PWE - Penn West Petroleum

[SharperDingaan]

Gentlemen, very well said.

 

The reality is that PWT is a very different firm today, to even what it was in 2015.

Like it or not, most would place it in the 1st quartile of todays comparable Western Canadian oil and gas firms. Prior history with PWT is not representative of where it is today, & investors can either 'move on' - or remain 'in the past'.

 

Accepting that PWT is a peer, it is currently valued at well below its 1st quartile peers.

At the current price - simply changing investor perceptions of PWT, would produce a significant gain. The compressed spring, and yin/yang inflexion point analogies that I refer to. As to what is it worth? - look to the 1st quartile peer metrics; as a group.

 

Where any of this 1st quartile group go from here is an educated guess.

The current level of PWT insider buying, relative to 1st quartile peers, evidences the management view. The commodity view comes down to each individual investors assessment; the near term price, sustainability, future prospects, etc.

 

SD

 

 

     

[Joe689]

Interested in seeing this 2017 budget plan with hopefully some updated numbers from sales and wells.  Really waiting till the last minute here.    Maybe it will be like last year and the plan won't come out till mid Jan

 

 

Merry Christmas & Happy Holidays!

[Uccmal]

Article: 

 

http://www.canadianbusiness.com/investing/penn-west-petroleum-slims-down/

 

I find it fascianting the way the rehab process works in sick companies.  It starts with them being basically written off such as BAC, FFH, and PWT have been with all negative press, and one or two crazy outliers.  Then people in the press allow that it may survive but will struggle forever..  And then they will do okay but you could get better returns elsewhere.  Finally, we get to where it is publicly recognized as a great company with great prospects.  We are just entering that last phase. 

[SharperDingaan]

It’s useful to recognize that the press is the fourth ‘state of the realm’ – the propaganda machine of the state; the financial industry is really just another ‘realm’ using the same tool. However propaganda works, only so long as nobody calls the bullshit. https://en.wikipedia.org/wiki/Estates_of_the_realm

 

The industry runs on commission and AUM fees. Hence there is incentive to distort ‘the story’, and oscillate between extreme views; to maximize the number of trades and the opportunities to draw in ‘new money’. But with algorhythms, hedge funds and mutual funds being the bulk of trading activity – much of the ‘distortion’ is internal, and self reinforcing. However as with all gamed systems; elites set the parameters of the game.

 

Commodity industries have the advantage of cyclicality, forcing a long-term investor to periodically assess where investment XYZ is in its cycle. Maximum ‘dissonance’ occurs at trough (turnaround is evident, but the financial industry is singing the blues), and peak (fading is evident, but the financial industry is singing optimism). To make it work the investor need only assess the trough correctly, and monitor the dissonance. As the next time that dissonance returns to high levels, XYZ must be approaching its peak, and it’s time to sell. By changing the play, you now resemble the elite setting the game.     

 

The PWT low has been correctly assessed, the bullshit called (ie: 100%+ YTD returns on PWT and Encana), and in the age of public boards it is no longer possible to hide it. With the start of the year it has become time to ‘discover’ PWT, and push the peer comparisons. All else equal, the PWT low base price relative to its peers, guarantees a 2017 outperformance.

 

The recent level of insider buying, suggests that PWT management would appear to agree with that assessment as well.

 

SD

 

[muscleman]

It’s useful to recognize that the press is the fourth ‘state of the realm’ – the propaganda machine of the state; the financial industry is really just another ‘realm’ using the same tool. However propaganda works, only so long as nobody calls the bullshit. https://en.wikipedia.org/wiki/Estates_of_the_realm

 

The industry runs on commission and AUM fees. Hence there is incentive to distort ‘the story’, and oscillate between extreme views; to maximize the number of trades and the opportunities to draw in ‘new money’. But with algorhythms, hedge funds and mutual funds being the bulk of trading activity – much of the ‘distortion’ is internal, and self reinforcing. However as with all gamed systems; elites set the parameters of the game.

 

Commodity industries have the advantage of cyclicality, forcing a long-term investor to periodically assess where investment XYZ is in its cycle. Maximum ‘dissonance’ occurs at trough (turnaround is evident, but the financial industry is singing the blues), and peak (fading is evident, but the financial industry is singing optimism). To make it work the investor need only assess the trough correctly, and monitor the dissonance. As the next time that dissonance returns to high levels, XYZ must be approaching its peak, and it’s time to sell. By changing the play, you now resemble the elite setting the game.     

 

The PWT low has been correctly assessed, the bullshit called (ie: 100%+ YTD returns on PWT and Encana), and in the age of public boards it is no longer possible to hide it. With the start of the year it has become time to ‘discover’ PWT, and push the peer comparisons. All else equal, the PWT low base price relative to its peers, guarantees a 2017 outperformance.

 

The recent level of insider buying, suggests that PWT management would appear to agree with that assessment as well.

 

SD

 

Where do you see the insider buy records? I can't find any from sec.gov.

http://www.nasdaq.com/symbol/pwe/insider-trades

This nasdaq site shows only insider sells.

[muscleman]

It’s useful to recognize that the press is the fourth ‘state of the realm’ – the propaganda machine of the state; the financial industry is really just another ‘realm’ using the same tool. However propaganda works, only so long as nobody calls the bullshit. https://en.wikipedia.org/wiki/Estates_of_the_realm

 

The industry runs on commission and AUM fees. Hence there is incentive to distort ‘the story’, and oscillate between extreme views; to maximize the number of trades and the opportunities to draw in ‘new money’. But with algorhythms, hedge funds and mutual funds being the bulk of trading activity – much of the ‘distortion’ is internal, and self reinforcing. However as with all gamed systems; elites set the parameters of the game.

 

Commodity industries have the advantage of cyclicality, forcing a long-term investor to periodically assess where investment XYZ is in its cycle. Maximum ‘dissonance’ occurs at trough (turnaround is evident, but the financial industry is singing the blues), and peak (fading is evident, but the financial industry is singing optimism). To make it work the investor need only assess the trough correctly, and monitor the dissonance. As the next time that dissonance returns to high levels, XYZ must be approaching its peak, and it’s time to sell. By changing the play, you now resemble the elite setting the game.     

 

The PWT low has been correctly assessed, the bullshit called (ie: 100%+ YTD returns on PWT and Encana), and in the age of public boards it is no longer possible to hide it. With the start of the year it has become time to ‘discover’ PWT, and push the peer comparisons. All else equal, the PWT low base price relative to its peers, guarantees a 2017 outperformance.

 

The recent level of insider buying, suggests that PWT management would appear to agree with that assessment as well.

 

SD

 

I checked the SEDAR website but couldn't find any insider buy records either.

I checked the 2016 Q3 numbers on that website.

If I back out the 111 M restructuring cost and 82 M Deferred funding asset expenses, Foreign exchange loss 19 M, the pretax income is still a negative 103 M. It seems like at current oil and gas prices, the company will burn out all its cash in one year without further asset sales.

 

All of this is done on just 115 million quarterly revenue. This means oil and gas prices have to double for this company just to break even.

Am I missing something?

 

 

 

[Uccmal]

It’s useful to recognize that the press is the fourth ‘state of the realm’ – the propaganda machine of the state; the financial industry is really just another ‘realm’ using the same tool. However propaganda works, only so long as nobody calls the bullshit. https://en.wikipedia.org/wiki/Estates_of_the_realm

 

The industry runs on commission and AUM fees. Hence there is incentive to distort ‘the story’, and oscillate between extreme views; to maximize the number of trades and the opportunities to draw in ‘new money’. But with algorhythms, hedge funds and mutual funds being the bulk of trading activity – much of the ‘distortion’ is internal, and self reinforcing. However as with all gamed systems; elites set the parameters of the game.

 

Commodity industries have the advantage of cyclicality, forcing a long-term investor to periodically assess where investment XYZ is in its cycle. Maximum ‘dissonance’ occurs at trough (turnaround is evident, but the financial industry is singing the blues), and peak (fading is evident, but the financial industry is singing optimism). To make it work the investor need only assess the trough correctly, and monitor the dissonance. As the next time that dissonance returns to high levels, XYZ must be approaching its peak, and it’s time to sell. By changing the play, you now resemble the elite setting the game.     

 

The PWT low has been correctly assessed, the bullshit called (ie: 100%+ YTD returns on PWT and Encana), and in the age of public boards it is no longer possible to hide it. With the start of the year it has become time to ‘discover’ PWT, and push the peer comparisons. All else equal, the PWT low base price relative to its peers, guarantees a 2017 outperformance.

 

The recent level of insider buying, suggests that PWT management would appear to agree with that assessment as well.

 

SD

 

Where do you see the insider buy records? I can't find any from sec.gov.

http://www.nasdaq.com/symbol/pwe/insider-trades

This nasdaq site shows only insider sells.

 

I have access through my brokerage accounts to Ink.  John Byrdson director has bought 850000 shares in December.  Another director bought 2500 shares - not much of a signal.  Byrdson is the interesting one: He bought 200000 shares in spring 2015, and then sold them at a loss in December 2015 - Tax loss sale?  He now holds in excess of 1 m. shares bought this yr.  Rick George, COB, has never sold his shares - over a million. 

 

Just an FYI, muscleman. 

[muscleman]

 

I have access through my brokerage accounts to Ink.  John Byrdson director has bought 850000 shares in December.  Another director bought 2500 shares - not much of a signal.  Byrdson is the interesting one: He bought 200000 shares in spring 2015, and then sold them at a loss in December 2015 - Tax loss sale?  He now holds in excess of 1 m. shares bought this yr.  Rick George, COB, has never sold his shares - over a million. 

 

Just an FYI, muscleman.

 

Thank you!

Is there any regulation in Canada that requires a SEDAR filing for insider buys? I find it a bit strange that the insider trades can't be found there. In the US all insider buys are filed as a form 4 in SEC.gov.

 

I posted my thoughts about its 2016 Q3 numbers. Mind sharing your thoughts? Am I missing anything?

 

 

[SharperDingaan]

Muscleman, we would suggest that you would be better served reading through the last 50 pages or so of this thread.

The risk today is now one of selling out too early.

 

SD 

 

 

I have access through my brokerage accounts to Ink.  John Byrdson director has bought 850000 shares in December.  Another director bought 2500 shares - not much of a signal.  Byrdson is the interesting one: He bought 200000 shares in spring 2015, and then sold them at a loss in December 2015 - Tax loss sale?  He now holds in excess of 1 m. shares bought this yr.  Rick George, COB, has never sold his shares - over a million. 

 

Just an FYI, muscleman.

 

Thank you!

Is there any regulation in Canada that requires a SEDAR filing for insider buys? I find it a bit strange that the insider trades can't be found there. In the US all insider buys are filed as a form 4 in SEC.gov.

 

I posted my thoughts about its 2016 Q3 numbers. Mind sharing your thoughts? Am I missing anything?

[Uccmal]

It’s useful to recognize that the press is the fourth ‘state of the realm’ – the propaganda machine of the state; the financial industry is really just another ‘realm’ using the same tool. However propaganda works, only so long as nobody calls the bullshit. https://en.wikipedia.org/wiki/Estates_of_the_realm

 

The industry runs on commission and AUM fees. Hence there is incentive to distort ‘the story’, and oscillate between extreme views; to maximize the number of trades and the opportunities to draw in ‘new money’. But with algorhythms, hedge funds and mutual funds being the bulk of trading activity – much of the ‘distortion’ is internal, and self reinforcing. However as with all gamed systems; elites set the parameters of the game.

 

Commodity industries have the advantage of cyclicality, forcing a long-term investor to periodically assess where investment XYZ is in its cycle. Maximum ‘dissonance’ occurs at trough (turnaround is evident, but the financial industry is singing the blues), and peak (fading is evident, but the financial industry is singing optimism). To make it work the investor need only assess the trough correctly, and monitor the dissonance. As the next time that dissonance returns to high levels, XYZ must be approaching its peak, and it’s time to sell. By changing the play, you now resemble the elite setting the game.     

 

The PWT low has been correctly assessed, the bullshit called (ie: 100%+ YTD returns on PWT and Encana), and in the age of public boards it is no longer possible to hide it. With the start of the year it has become time to ‘discover’ PWT, and push the peer comparisons. All else equal, the PWT low base price relative to its peers, guarantees a 2017 outperformance.

 

The recent level of insider buying, suggests that PWT management would appear to agree with that assessment as well.

 

SD

 

I checked the SEDAR website but couldn't find any insider buy records either.

I checked the 2016 Q3 numbers on that website.

If I back out the 111 M restructuring cost and 82 M Deferred funding asset expenses, Foreign exchange loss 19 M, the pretax income is still a negative 103 M. It seems like at current oil and gas prices, the company will burn out all its cash in one year without further asset sales.

 

All of this is done on just 115 million quarterly revenue. This means oil and gas prices have to double for this company just to break even.

Am I missing something?

 

I cant tell where your numbers came from.  I get the quarterly revenue number.  Annualized it is 460 million.  But the rest I dont get.

 

As part of their debt prepayment they had 113 million in foreign exchange costs in the 3rd. Q.  Is this what your are calling the restructuring charge? 

 

The debt run rate has come down from 120 million per year at the start of the third quarter to 31 million per year later in the 3rd Q (my estimates).  I used 6.5% for this number.  This reduction in run rate wasn't reflected in the 3rd. Q.  The prepayments were done in early Sept. 

 

Capex is estimated to be 150 m for next year.  The intent of this capex is to increase production by 10% per year.  Then there is Opex, Admin, and Royalties, in decending order of size.  Once these are accounted for I will give them the 120 m per year FFO, at the prices realized in the third Q. 

 

More should become clear with their budget release this week. 

 

There is no question it looks messy. 

 

 

[SharperDingaan]

We would add to this the interest saving (assume 6.94%) on all the debt they repaid in 2016;

comes out to an additional 95-100M of savings for 2017 that would increase FFO to around 250M/yr, all else equal.

 

Look at the recent PPT netback sensitivity slides. Oil & gas is priced in USD and those sensitivities used a FX rate of 1.25; the FX rate today is 1.34 and highly likely not to decline over 2017. Netbacks are understated and would further increase FFO, all else equal.

 

Go to the 2015 AR, and lookup the assumptions of the reserves calculation.

Most would expect a 2016 bias towards a reserve revaluation, pumping up equity.

 

Do just a high-level metrics comparison on PWT, versus peers - & you will deservedly get kicked in the teeth.

The above items are just the obvious levers, there are a great many other tools in the toolbox as well. 

 

SD

 

 

[muscleman]

Uccmal, the numbers are all from here:

http://www.sedar.com/search/search_form_pc_en.htm

 

Open that page and enter "Penn West Petroleum". Click search. Then there is a November 2nd document "Interim financial statements/report - English". Open that.

On page 1 we can see the long term debt has already been reduced to 443. On page 2, financing cost is 22. Restructuring 111. Loss (gain) on dispositions 2. Deferred funding asset 82.

Oil and natural gas sales and other income 115 (This is the revenue line). Impairment is bundled into the D&A item. Looking at page 7, "During the third quarter of 2016, the Company recorded $13 million of PP&E impairment ($18 million before-tax)". Foreign exchange loss 19.

 

Note that the total long term debt is detailed on page 8, and current portion is 469 m and long term portion is 443. Therefore if the current portion is paid down, assuming a 7% rate, they still need to pay 8.2m per quarter, instead of 22 above. The actual interest rate can be calculated from the page 8 debt table but I am just doing an estimate. So I can adjust the interest expense by 22-8=14 m per quarter.

 

 

 

Lets take "Loss before taxes" of 315 and add up all of the above one time items. -315+14+19+18+82+111+2=-69.

 

They will still be losing 69 M per quarter after all of these adjustments.

 

 

Note that I didn't use FFO metrics because I think D&A is real in the oil and gas industry. And I believe the D&A expense tends to be lower than the actual one. The trick is to have optimistic assumptions about well life and apply a lower Depreciation, so earnings can be reported higher. Then from time to time, apply a one time impairment charge. People will ignore the one time impairment charge and add it back to the earnings just like I just did above.  :D

 

 

 

 

 

[SharperDingaan]

Q3 Report Note 6. Subtract the current senior notes o/s from the 12/31/2015 total.

They repaid 1,339M @ 7.6%/yr - it now produces an interest saving of 101.76M per year.

 

Annualise the 32M of Q3 FFO & you get 128M. Add the 101M of interest saving & you get a FFO around 229M.

It will actually be higher in 2017, as 2017 prices are highly likely to be better than the average price of Q3 2016.

 

Anyway you look at this, it's a gift.

 

SD

 

Very nice quarter.

 

47M profit at current WTI pricing levels.

-232 loss + 108 (Office Space Impairment, Note 7) + 89 (BC Impairment, Note 4) + 82 (Peace River Charge, Note 3) = 47 

 

32M of FFO. That 150M 2017 drilling budget is now entirely self funding; good on them. 

There will also be 25-125 of additional Phase 2 sales sometime over Q4, and realized interest savings on the 437 just paid down. Insurance.

 

What's not to like.

 

SD

[muscleman]

Very nice quarter.

 

47M profit at current WTI pricing levels.

-232 loss + 108 (Office Space Impairment, Note 7) + 89 (BC Impairment, Note 4) + 82 (Peace River Charge, Note 3) = 47 

 

32M of FFO. That 150M 2017 drilling budget is now entirely self funding; good on them. 

There will also be 25-125 of additional Phase 2 sales sometime over Q4, and realized interest savings on the 437 just paid down. Insurance.

 

What's not to like.

 

SD

 

-232 loss + 108 (Office Space Impairment, Note 7) + 89 (BC Impairment, Note 4) + 82 (Peace River Charge, Note 3) = 47 

I am not sure if this is the right way to calculate the 47 M profit.

I think we should use pretax income to start the adjustments, and then adjust by tax at the end.

 

So by your formula it really should be -315 + 108 (Office Space Impairment, Note 7) + 89 (BC Impairment, Note 4) + 82 (Peace River Charge, Note 3) = -46 M pretax loss.

 

[Uccmal]

Okay, a simple version: 

 

Using 3 Q numbers except financing, and Capex.  For Capex I have used their stated 2017 Capex of 150 Million.  I have used forward estimates of financing. 

 

The Capex is designed to increase production by 10% per year.  I have completely left out any benefits from DD&A, and benefits or losses from Taxes.  By accounting standards this isn't entirely correct, but it shows cash expenditures.  By virtue of using Q3 numbers I have a lower revenue than they likely make, barring a commodity reversal.  Purely a cash exercise. 

 

2017 Annual:

Revenue: 544 Million

Subtract:

Operating Expenses: 220

Cap ex (stated): 150

Development Expenditure: 16

Transport: 28 M

Financing: 30 m

Royalties: 24 M

 

Net Cash: 76 M

 

I have ignored DD&A because this amount is covered in Capex.  By ignoring it, I have also ignored the benefits that the company would receive from deducting it.  Does this make sense?

 

Caveats: both ways:

We dont know how much production they start 2017, with since there have been dispositions.  We wont know how much of the disposition cash will go to debt reduction, further decreasing finance costs, or if it gets spent on further capex on their existing properties, or on buying production on an adjacent property. 

We dont know commodity prices going forward, but we do know that Nat. Gas is way up at the moment. 

 

Should oil shoot as far as 60 USD they will bring in nearly double the cash.  Revenue goes up but costs are steady (they probably rise a little). 

 

 

 

[SharperDingaan]

"So by your formula it really should be -315 + 108 (Office Space Impairment, Note 7) + 89 (BC Impairment, Note 4) + 82 (Peace River Charge, Note 3) = -46 M pretax loss."

 

Hate to tell you this, but we start from net income after tax (net comprehensive loss) for a reason. When we make money we pay taxes, when we lose it we get a recovery on previous taxes. You should be starting from the -232 loss, net of the tax recovery. Also keep in mind that I estimated a 47M Q3 net income before impairments, & Uccmal estimated 76M of 2017 cash generation; they are not the same thing. 

 

You also may want to look a little closer at the non-core assets  ;)

It might surprise you.

 

SD

 

 

[muscleman]

Okay, a simple version: 

 

Using 3 Q numbers except financing, and Capex.  For Capex I have used their stated 2017 Capex of 150 Million.  I have used forward estimates of financing. 

 

The Capex is designed to increase production by 10% per year.  I have completely left out any benefits from DD&A, and benefits or losses from Taxes.  By accounting standards this isn't entirely correct, but it shows cash expenditures.  By virtue of using Q3 numbers I have a lower revenue than they likely make, barring a commodity reversal.  Purely a cash exercise. 

 

2017 Annual:

Revenue: 544 Million

Subtract:

Operating Expenses: 220

Cap ex (stated): 150

Development Expenditure: 16

Transport: 28 M

Financing: 30 m

Royalties: 24 M

 

Net Cash: 76 M

 

I have ignored DD&A because this amount is covered in Capex.  By ignoring it, I have also ignored the benefits that the company would receive from deducting it.  Does this make sense?

 

Caveats: both ways:

We dont know how much production they start 2017, with since there have been dispositions.  We wont know how much of the disposition cash will go to debt reduction, further decreasing finance costs, or if it gets spent on further capex on their existing properties, or on buying production on an adjacent property. 

We dont know commodity prices going forward, but we do know that Nat. Gas is way up at the moment. 

 

Should oil shoot as far as 60 USD they will bring in nearly double the cash.  Revenue goes up but costs are steady (they probably rise a little).

 

Not sure how you get the 544 million revenue. In 2016 q3, there is 115 million O&G revenue and 28 M risk management, which is mostly settlement of futures contracts. As the oil price remains low, this number will dwindle to zero. Therefore if you really assume a stagnant commodity price, this part cannot be included.

 

Therefore the 2017 annual revenue should be 460 million instead of 544.

 

 

 

[muscleman]

"So by your formula it really should be -315 + 108 (Office Space Impairment, Note 7) + 89 (BC Impairment, Note 4) + 82 (Peace River Charge, Note 3) = -46 M pretax loss."

 

Hate to tell you this, but we start from net income after tax (net comprehensive loss) for a reason. When we make money we pay taxes, when we lose it we get a recovery on previous taxes. You should be starting from the -232 loss, net of the tax recovery. Also keep in mind that I estimated a 47M Q3 net income before impairments, & Uccmal estimated 76M of 2017 cash generation; they are not the same thing. 

 

You also may want to look a little closer at the non-core assets  ;)

It might surprise you.

 

SD

 

After tax income = (the sum of pretax revenues- the sum of pretax expenses.) * (1-tax rate)

 

When you back out a pretax expense, you should start with (the sum of pretax revenues- the sum of pretax expenses.) which is -315 and back out the one time expense from there. Then apply the tax rate to get after tax income.

[Uccmal]

Okay, a simple version: 

 

Using 3 Q numbers except financing, and Capex.  For Capex I have used their stated 2017 Capex of 150 Million.  I have used forward estimates of financing. 

 

The Capex is designed to increase production by 10% per year.  I have completely left out any benefits from DD&A, and benefits or losses from Taxes.  By accounting standards this isn't entirely correct, but it shows cash expenditures.  By virtue of using Q3 numbers I have a lower revenue than they likely make, barring a commodity reversal.  Purely a cash exercise. 

 

2017 Annual:

Revenue: 544 Million

Subtract:

Operating Expenses: 220

Cap ex (stated): 150

Development Expenditure: 16

Transport: 28 M

Financing: 30 m

Royalties: 24 M

 

Net Cash: 76 M

 

I have ignored DD&A because this amount is covered in Capex.  By ignoring it, I have also ignored the benefits that the company would receive from deducting it.  Does this make sense?

 

Caveats: both ways:

We dont know how much production they start 2017, with since there have been dispositions.  We wont know how much of the disposition cash will go to debt reduction, further decreasing finance costs, or if it gets spent on further capex on their existing properties, or on buying production on an adjacent property. 

We dont know commodity prices going forward, but we do know that Nat. Gas is way up at the moment. 

 

Should oil shoot as far as 60 USD they will bring in nearly double the cash.  Revenue goes up but costs are steady (they probably rise a little).

 

Not sure how you get the 544 million revenue. In 2016 q3, there is 115 million O&G revenue and 28 M risk management, which is mostly settlement of futures contracts. As the oil price remains low, this number will dwindle to zero. Therefore if you really assume a stagnant commodity price, this part cannot be included.

 

Therefore the 2017 annual revenue should be 460 million instead of 544.

 

You do have a point there.  I included the risk management gains, and they will likely dwindle.  However, my assumptions used prices as they were in the 3rd Q, which are lower than prices have been in the 4th Q, and prices as they are today.  PWT, for me, since late 2015, has always been a bet on oil and gas prices rising.  With the huge asset sales late in the 2nd Q, the company also became much safer, and I became much more comfortable holding it. 

 

I also dont think your contention above that they are burning cash is correct.  I am not going to comment further until they issue their plan on Thursday.  You gave me lots to think about and look at.

[muscleman]

Okay, a simple version: 

 

Using 3 Q numbers except financing, and Capex.  For Capex I have used their stated 2017 Capex of 150 Million.  I have used forward estimates of financing. 

 

The Capex is designed to increase production by 10% per year.  I have completely left out any benefits from DD&A, and benefits or losses from Taxes.  By accounting standards this isn't entirely correct, but it shows cash expenditures.  By virtue of using Q3 numbers I have a lower revenue than they likely make, barring a commodity reversal.  Purely a cash exercise. 

 

2017 Annual:

Revenue: 544 Million

Subtract:

Operating Expenses: 220

Cap ex (stated): 150

Development Expenditure: 16

Transport: 28 M

Financing: 30 m

Royalties: 24 M

 

Net Cash: 76 M

 

I have ignored DD&A because this amount is covered in Capex.  By ignoring it, I have also ignored the benefits that the company would receive from deducting it.  Does this make sense?

 

Caveats: both ways:

We dont know how much production they start 2017, with since there have been dispositions.  We wont know how much of the disposition cash will go to debt reduction, further decreasing finance costs, or if it gets spent on further capex on their existing properties, or on buying production on an adjacent property. 

We dont know commodity prices going forward, but we do know that Nat. Gas is way up at the moment. 

 

Should oil shoot as far as 60 USD they will bring in nearly double the cash.  Revenue goes up but costs are steady (they probably rise a little).

 

Not sure how you get the 544 million revenue. In 2016 q3, there is 115 million O&G revenue and 28 M risk management, which is mostly settlement of futures contracts. As the oil price remains low, this number will dwindle to zero. Therefore if you really assume a stagnant commodity price, this part cannot be included.

 

Therefore the 2017 annual revenue should be 460 million instead of 544.

 

You do have a point there.  I included the risk management gains, and they will likely dwindle.  However, my assumptions used prices as they were in the 3rd Q, which are lower than prices have been in the 4th Q, and prices as they are today.  PWT, for me, since late 2015, has always been a bet on oil and gas prices rising.  With the huge asset sales late in the 2nd Q, the company also became much safer, and I became much more comfortable holding it. 

 

I also dont think your contention above that they are burning cash is correct.  I am not going to comment further until they issue their plan on Thursday.  You gave me lots to think about and look at.

 

Thank you. It is usually the discussions that clarifies things.

You also made a good point that the capex is 150 m next year. I thought the 2016 Q3's D&A item indicates what's the capex next year, but that's clearly wrong.

 

I am not saying oil prices will stay this low. I am just trying to get a sense of profitability levels at different oil price levels.

Also note that their production mix seems to be 40% oil and 60% nat gas, based on their Q3's oil production vs total BOE number. Therefore you would have to look at both oil and gas prices for PWE's future profitability.

 

 

 

[Uccmal]

MM, Its funny.  I had in my mind that their production mix was 80% oil; 20% gas.  I hold two other e&p's, so I get confused.  You mention 60/40.  I just took a look and It seems to be roughly 50/50 if you include NGLs.  I hadn't realized this.  I know I wasn't going to comment further but that changes the dynamic somewhat.  They are going to take a writedown on Q4 and Q1 hedges but at the same time get much higher product prices.  It also allows them to hedge out further at much higher Gas prices. 

 

Thanks BTW: I have learned alot doing this. 

 

 

[SharperDingaan]

'When you back out a pretax expense, you should start with (the sum of pretax revenues- the sum of pretax expenses.) which is -315 and back out the one time expense from there. Then apply the tax rate to get after tax income.'

 

There are different methodologies. The pre tax methodology you've chosen requires the user to also add back the tax effect on the backed out expenses; the after tax methodology doesn't have that restriction. However, both methodologies just produce estimates - as we don't know the actual tax recovery. While comment is always good, lets leave it until after management has spoken this week. As shareholders we hire them to run the company for us - and need to give them space to do their thing.

 

SD   

[Joe689]

Glad to hear final depos finished at the upper end of guidance.   

 

[SharperDingaan]

Very nice update gentlemen.

 

Notable is that FFO is now up to 225M from the previous 150M. At $C 2.38 PWT was trading at 8x FFO ((8x150)/502.6 = 2.387). With FFO at 225M it should now trade for at least $C3.58. Arguably the de-risking via the 50% oil & 30% gas hedges, & the completed phase II asset sales; warrants a rise in the multiple as well.

 

Dec-31 debt is around 469M (139 notes, 330 facility). It is not unreasonable that during Q1, net of the 80M in asset sale proceeds, all the senior notes get retired; leaving the facility at 389M. Elimination of the covenants, and additional 2017 interest savings, to go along with the 2.5M saving in reduced standby fees.     

 

Nice to see the Manville exploration, & much of it risk shared with partners.

It’s a small patch, there is a need to share the wealth, and it significantly improves their ongoing access to the most efficient rigs.   

 

What’s not to like.

 

SD

 

[Uccmal]

Sounds like they have kept alot of production they were planning on selling.

 

They have not given the actual production numbers but have rather focussed on the "core" areas where they will be doing development.  So the core areas are to produce 28000 bpd, and the other areas are not mentioned.  Or am I reading this wrong. 

 

I am curious about the firings, or resignations.  I dont think it signifies anything other than a consolidation of power by the new CEO, just curious.