PWE - Penn West Petroleum

[bizaro86]

Not in Calgary it isn't...

[Liberty]

Not in Calgary it isn't...

 

Polishing your clubs for a few months is still better than being tied to this crap company.

[SharperDingaan]

Just a voluntary discolsure that we have again materially added to our position.

 

We expect that the 7:1 share consolidation will take place, and that the market will re-rate with a US multiple.

We further anticipate around 160M+ of 2019 FFO, all else equal.

And a equity raise early in late 2H2019 for about 100M.

 

Finally, we have a 'real' company.

Good luck!

 

SD

 

 

 

[Joe689]

You think FF more or less taking over management and board indicates that they plan to go forward with this company organically?

 

Ritchie new chairman is a banker, the new interim CEO, the former FF nominated director.  No new hedges.

 

I see the white flag being waved but just my opinion

[Pelagic]

Just a voluntary discolsure that we have again materially added to our position.

 

We expect that the 7:1 share consolidation will take place, and that the market will re-rate with a US multiple.

We further anticipate around 160M+ of 2019 FFO, all else equal.

And a equity raise early in late 2H2019 for about 100M.

 

Finally, we have a 'real' company.

Good luck!

 

SD

 

Why do you foresee an equity raise in 2H19? Something in the range of 160M FFO seems reasonable vs. 120M in capex, why raise 100M if they're cash flow positive and for what purpose if Alberta keeps production constraints in place?

 

 

[Liberty]

Just a voluntary discolsure that we have again materially added to our position.

 

We expect that the 7:1 share consolidation will take place, and that the market will re-rate with a US multiple.

We further anticipate around 160M+ of 2019 FFO, all else equal.

And a equity raise early in late 2H2019 for about 100M.

 

Finally, we have a 'real' company.

Good luck!

 

SD

 

Finally?

 

Down almost 50% since your cup of coffee comment last November...

 

Why would it rerate? What does reverse-stock-splits have anything to do with it, they don't change the underlying value one bit..?

 

Why is an equity raise a good thing if you're saying that it's incredibly undervalued? Wouldn't that just heavily dilute existing shareholders? How can you have confidence they'd get good returns on that incremental capital since they've destroyed most of the existing capital?

 

It's a 200m market cap, wouldn't a 100m equity raise basically wipe you out? It's still leveraged at 2.6x EBITDA on falling EBITDA as a cyclical company, isn't that worrying? 400m of debt on a 200m market cap seems a bit lopsided... You can always get lucky with an equity stub because volatility will be high, but so far they've proven really adept at incinerating capital (-15% ROE, -64% EBIT margin last year, equity has been shrinking at a -24% CAGR for the past 5 years) so time isn't on your side. And that's before factoring that you can't know what the oil price will do in the next year.

[doc75]

Finally?

 

Down almost 50% since your cup of coffee comment last November...

 

Why would it rerate? What does reverse-stock-splits have anything to do with it, they don't change the underlying value one bit..?

 

Why is an equity raise a good thing if you're saying that it's incredibly undervalued? Wouldn't that just heavily dilute existing shareholders? How can you have confidence they'd get good returns on that incremental capital since they've destroyed most of the existing capital?

 

It's a 200m market cap, wouldn't a 100m equity raise basically wipe you out? It's still leveraged at 2.6x EBITDA on falling EBITDA as a cyclical company, isn't that worrying? 400m of debt on a 200m market cap seems a bit lopsided... You can always get lucky with an equity stub because volatility will be high, but so far they've proven really adept at incinerating capital (-15% ROE, -64% EBIT margin last year, equity has been shrinking at a -24% CAGR for the past 5 years) so time isn't on your side. And that's before factoring that you can't know what the oil price will do in the next year.

 

So, like, are you long?  j/k

 

FWIW I think they're posturing for a sale.

[SharperDingaan]

Share count drops from 507M to 72.4M - say 75M Fully Diluted.

At 7 times less float, a change in demand, on that now small float; will exagerate price moves.

..... and turns the shares into currency.

 

NYSE listing retained, and US daily trading volume at roughly 3-6x that of the TSX.

In a improving o/g environment it will be US, not CDN, multiples that set price. 

 

You either think they have material FFO in 2019, or you don't.

(160M x 5)/75 suggests a price of around CAD 10.67/consolidated share.

100M for roughly 9.4M consolidated shares (13% dilution), and they can get to keep Viking/PR

... if the majority of these shares are sold as a single 'block' to someone, they will go for a premium

... if the float increases 13% they will be easier to trade, raising demand, and price

... if Viking/PR are retained, they can be spun out later as new corporate entities instead, and for materially more.

 

Swing trades are a wonderful thing. Had you exploited the Dec tax-loss selling, and successfully sold into the Jan/Feb rallies, a good chunk of your March repurchases would have been funded with profits earned. More shares for the same Dec cash injection.

 

We will know by early summer, whether our 2019 FFO estimate is reasonable.

We will know by early fall whether a new share issue is reasonable, and for roughly what price.

At $10/consolidated share, our gains will be large enough to buy a house in St John, Newfoundland. Mortgage free. 

.... and the original investment can return to our bond portfolio.

 

If they get bought out, versus remain independent, we're largely indifferent.

Whether we're holding the shares of OBE, or someone else, we're still holding shares of higher value.

 

It's not for everyone. You either see cyclicality as a threat, or as an opportunity.

We think we could do very well, and don't have a time limit.

 

SD

 

 

 

[Liberty]

Share count drops from 507M to 72.4M - say 75M Fully Diluted.

At 7 times less float, a change in demand, on that now small float; will exagerate price moves.

..... and turns the shares into currency.

 

NYSE listing retained, and US daily trading volume at roughly 3-6x that of the TSX.

In a improving o/g environment it will be US, not CDN, multiples that set price. 

 

You either think they have material FFO in 2019, or you don't.

(160M x 5)/75 suggests a price of around CAD 10.67/consolidated share.

100M for roughly 9.4M consolidated shares (13% dilution), and they can get to keep Viking/PR

... if the majority of these shares are sold as a single 'block' to someone, they will go for a premium

... if the float increases 13% they will be easier to trade, raising demand, and price

... if Viking/PR are retained, they can be spun out later as new corporate entities instead, and for materially more.

 

Swing trades are a wonderful thing. Had you exploited the Dec tax-loss selling, and successfully sold into the Jan/Feb rallies, a good chunk of your March repurchases would have been funded with profits earned. More shares for the same Dec cash injection.

 

We will know by early summer, whether our 2019 FFO estimate is reasonable.

We will know by early fall whether a new share issue is reasonable, and for roughly what price.

At $10/consolidated share, our gains will be large enough to buy a house in St John, Newfoundland. Mortgage free. 

.... and the original investment can return to our bond portfolio.

 

If they get bought out, versus remain independent, we're largely indifferent.

Whether we're holding the shares of OBE, or someone else, we're still holding shares of higher value.

 

It's not for everyone. You either see cyclicality as a threat, or as an opportunity.

We think we could do very well, and don't have a time limit.

 

SD

 

???

[SharperDingaan]

That's why we have a market  ;D

 

SD

 

[Spekulatius]

FFO doesn’t mean much, if you need put in $1.5 to get $1.0 back. They are still advertising 40% IRR in their presentation, yet they are producing huge GAAP losses.

 

They should throw away the key to their equipment and just run their wells until they are dry and sell of nonproducing land.

 

We discussed in another thread that if something isn’t working you should stop digging first. somebody forget to tell this to drillers and miners.

[SharperDingaan]

FFO doesn’t mean much, if you need put in $1.5 to get $1.0 back. They are still advertising 40% IRR in their presentation, yet they are producing huge GAAP losses.

 

They should throw away the key to their equipment and just run their wells until they are dry and sell of nonproducing land.

 

We discussed in another thread that if something isn’t working you should stop digging first. somebody forget to tell this to drillers and miners.

 

This is why most of the world looks at forward earnings, and NOT history.

Makes value investors balistic as the past performance of commodity businesses, with no moat, is not a performance predictor.

 

Execution of capex in a commodity business is also very different.

FFO is just 'cash-flow' that would permit a reserve acquisition (CapEx), ideally in a commodity-cycle trough. Obviously the more FFO you can generate the better. The more efficient (low cost) and effective (technique, multi pay-zones) you can be: the more your daily/weekly production will be, and the more you can sell it for - the more cash you'll get. Lots of levers, some of which are out of the company control (ability to transport to market).

 

Industry CapEx > FFO is a common problem amongst many industries.

Problem is that we think of $1 of CapEx, as ALWAYS being equal to $1 of FFO. But very few realize that every time you buy an o/g asset in a trough, you're paying cents on the dollar of CapEx for it. The CapEx is < the expected FFO at the cycle average, and 'average' industry capital efficiency is being restored.

 

The recent reserve report puts 2PNPV10 value at $2.40/share (FFO), that you can currently buy for $0.38/share (CapEx).

Pretty straightforward decision.

 

SD

 

 

 

 

 

[Liberty]

This is why most of the world looks at forward earnings, and NOT history.

 

This whole thread has been "looking forward" and "disregarding the past" of this company. Why is this time different?

[SharperDingaan]

This is why most of the world looks at forward earnings, and NOT history.

 

This whole thread has been "looking forward" and "disregarding the past" of this company. Why is this time different?

 

No difference. You still have a 50% chance of being right, just as you always have.

Whether you act on it or not, makes a market.

 

SD

 

[Liberty]

This is why most of the world looks at forward earnings, and NOT history.

 

This whole thread has been "looking forward" and "disregarding the past" of this company. Why is this time different?

 

No difference. You still have a 50% chance of being right, just as you always have.

Whether you act on it or not, makes a market.

 

SD

 

Why 50%?

[Spekulatius]

This is why most of the world looks at forward earnings, and NOT history.

 

This whole thread has been "looking forward" and "disregarding the past" of this company. Why is this time different?

 

No difference. You still have a 50% chance of being right, just as you always have.

Whether you act on it or not, makes a market.

 

SD

 

In my opinion, the chance of being right is way less than 50%. Management has no credibility, since they haven’t been able to come even close to their forecasts for many years. Right now, it looks like they are spending ~$1.5 to get $1.0 . I know it’s steady state, but it never was. This is like Sears but in the oil and gas sector and they have a lot of company.

[Joe689]

French (current CEO pending departure) announced his new job today.    Seems like this was all orchestrated in a smooth manner and had been known for at least a couple months.

 

If that was the case, why did they not have a formal CEO search going on in the meantime?  Instead they name a director as interim?  But with a "1 year contract".  So odd.

 

 

[SharperDingaan]

Every investor makes their own investment decision based on available information. Good, bad, or indifferent.

The share price then either goes your way, or it doesn't. A 1 in 2 chance you're correct, is 50%.

 

We don't know today, if OBE will still be independent a year from now.

But we will know, a year from now, if they are.

 

If they get taken out in the interim for a good premium, so be it. Well north of 5.5x FFO.

If not, & they've been delivering, simply offer the interim CEO the permanent job upon contract expiry.

Non issue.

 

SD

 

[Uccmal]

This is why most of the world looks at forward earnings, and NOT history.

 

This whole thread has been "looking forward" and "disregarding the past" of this company. Why is this time different?

 

No difference. You still have a 50% chance of being right, just as you always have.

Whether you act on it or not, makes a market.

 

SD

 

In my opinion, the chance of being right is way less than 50%. Management has no credibility, since they haven’t been able to come even close to their forecasts for many years. Right now, it looks like they are spending ~$1.5 to get $1.0 . I know it’s steady state, but it never was. This is like Sears but in the oil and gas sector and they have a lot of company.

 

Good comparison. 

 

French (current CEO pending departure) announced his new job today.    Seems like this was all orchestrated in a smooth manner and had been known for at least a couple months.

 

If that was the case, why did they not have a formal CEO search going on in the meantime?  Instead they name a director as interim?  But with a "1 year contract".  So odd.

 

 

 

They are trying to sell themselves.  Problem is their assets are trapped behind the price/geography bottleneck.  Right now, no one wants to add production in that location.  Everyone has been curtailing their production behind the ‘wall’.  Whitecap is a case in point.  Most of their capital this year is being directed in front of the ‘wall’, in Sask., and their stock price is getting hammered anyways. 

[Joe689]

Uccmal, yes that is the problem here.  Our assets offer a great growth prospect.  But that prospect is invalid under Alberta curtailment.    This more or less is forcing companies to actually run like solvent businesses.  Pay down debt, pay a div, buyback shares etc. 

 

 

So organic growth is not possible.  But do note that growth through acquisition is valid.  The curtailment rules outline that explicitly that volumes between companies can be shared as long as they stay under the aggregated limit.

 

So you can still perform a accretive transaction for your shareholders.  Acquiring OBE's cash flow and ridding their corporate overhead would likely allow the acquirer to increase div.  Keep in mind, our waterflood assets, which help keep this company decline under 20% , so we are positioned OK to help pay income.

 

Another problem is currency.  Most of OBE's peers are beat down as well.  They likely do not want to dilute down here.  And not many would want to increase debt.    So timing, it likely a problem.    Most peers probably know that buying back shares is better move right now until their paper recovers. 

 

By the way, anyone hear about this "secondary market" to get around curtailment?  Buying someone else's production?  Artificial markets create weird things. 

[Liberty]

Every investor makes their own investment decision based on available information. Good, bad, or indifferent.

The share price then either goes your way, or it doesn't. A 1 in 2 chance you're correct, is 50%.

 

That's not how probabilities work. It's not 50% because you can either be correct or incorrect.

 

If I try to predict whether the sun will come up tomorrow, I'll either be correct or incorrect, but that doesn't mean that there's a 50% chance for each outcome.

 

Known facts and data about a situation forms prior probabilities. In the case of the sun, we have thousands of years of recorded human history and a deep understanding of orbital mechanics and so we can be very precise about whether we'll see it rise tomorrow, so the priors might be 99.999999999%.

 

In the case of this company, we can look at a lot of things to determine how likely they're to turn around and for the stock to do well (commodity price, management quality, the assets they have, balance sheet, income statement, cashflows, contracts, competition, what the market is pricing in (market isn't perfect, but it's decently efficient), etc).

 

Just saying it's a coin toss, as if we had no information at all making one outcome more probable than the other, is either willful blindness or a misunderstanding of probabilities. I'm not sure which it is.

[Uccmal]

Uccmal, yes that is the problem here.  Our assets offer a great growth prospect.  But that prospect is invalid under Alberta curtailment.    This more or less is forcing companies to actually run like solvent businesses.  Pay down debt, pay a div, buyback shares etc. 

 

 

So organic growth is not possible.  But do note that growth through acquisition is valid.  The curtailment rules outline that explicitly that volumes between companies can be shared as long as they stay under the aggregated limit.

 

So you can still perform a accretive transaction for your shareholders.  Acquiring OBE's cash flow and ridding their corporate overhead would likely allow the acquirer to increase div.  Keep in mind, our waterflood assets, which help keep this company decline under 20% , so we are positioned OK to help pay income.

 

Another problem is currency.  Most of OBE's peers are beat down as well.  They likely do not want to dilute down here.  And not many would want to increase debt.    So timing, it likely a problem.    Most peers probably know that buying back shares is better move right now until their paper recovers. 

 

By the way, anyone hear about this "secondary market" to get around curtailment?  Buying someone else's production?  Artificial markets create weird things.

 

Joe, thanks.  Lots of good points, especially the one about currency.  The prime issue I was getting at was that even without the curtailments they are behind the ‘wall’ as I am calling it.  There simply isn’t enough take away capacity in that region at the moment for much growth in that area of Alberta.  Adding rail will help, and Line 3 will help, indirectly,by taking pressure off the other pipe in the region. 

 

 

Now you dont really need growth in production to get the stock up or make it more desirable.  You just need a better price.  To get that you need to take product off the market or hope for a turn of events that makes these low decline rates more valuable.  Hope of course is the four letter word of investing. 

[SharperDingaan]

Uccmal, yes that is the problem here.  Our assets offer a great growth prospect.  But that prospect is invalid under Alberta curtailment.    This more or less is forcing companies to actually run like solvent businesses.  Pay down debt, pay a div, buyback shares etc. 

 

 

So organic growth is not possible.  But do note that growth through acquisition is valid.  The curtailment rules outline that explicitly that volumes between companies can be shared as long as they stay under the aggregated limit.

 

So you can still perform a accretive transaction for your shareholders.  Acquiring OBE's cash flow and ridding their corporate overhead would likely allow the acquirer to increase div.  Keep in mind, our waterflood assets, which help keep this company decline under 20% , so we are positioned OK to help pay income.

 

Another problem is currency.  Most of OBE's peers are beat down as well.  They likely do not want to dilute down here.  And not many would want to increase debt.    So timing, it likely a problem.    Most peers probably know that buying back shares is better move right now until their paper recovers. 

 

By the way, anyone hear about this "secondary market" to get around curtailment?  Buying someone else's production?  Artificial markets create weird things.

 

Joe, thanks.  Lots of good points, especially the one about currency.  The prime issue I was getting at was that even without the curtailments they are behind the ‘wall’ as I am calling it.  There simply isn’t enough take away capacity in that region at the moment for much growth in that area of Alberta.  Adding rail will help, and Line 3 will help, indirectly,by taking pressure off the other pipe in the region. 

 

 

Now you dont really need growth in production to get the stock up or make it more desirable.  You just need a better price.  To get that you need to take product off the market or hope for a turn of events that makes these low decline rates more valuable.  Hope of course is the four letter word of investing.

 

Per the price; their hedges continue to roll off without replacement, which should improved FFO

Per sales; agreed it's not really practical at the moment.

 

SD

 

 

[SharperDingaan]

Every investor makes their own investment decision based on available information. Good, bad, or indifferent.

The share price then either goes your way, or it doesn't. A 1 in 2 chance you're correct, is 50%.

 

That's not how probabilities work. It's not 50% because you can either be correct or incorrect.

 

If I try to predict whether the sun will come up tomorrow, I'll either be correct or incorrect, but that doesn't mean that there's a 50% chance for each outcome.

 

Known facts and data about a situation forms prior probabilities. In the case of the sun, we have thousands of years of recorded human history and a deep understanding of orbital mechanics and so we can be very precise about whether we'll see it rise tomorrow, so the priors might be 99.999999999%.

 

In the case of this company, we can look at a lot of things to determine how likely they're to turn around and for the stock to do well (commodity price, management quality, the assets they have, balance sheet, income statement, cashflows, contracts, competition, what the market is pricing in (market isn't perfect, but it's decently efficient), etc).

 

Just saying it's a coin toss, as if we had no information at all making one outcome more probable than the other, is either willful blindness or a misunderstanding of probabilities. I'm not sure which it is.

 

An investor takes all available information; then makes a decision. It either works, or it doesn't (binary).

Whether we think the supporting information is questionable (trust), or even emperical (physics), speaks to our confidence in the probable outcome, not the outcome itself. We are not determing probability weighted expected value, we're simply recognizing that value is either 1 (the investment worked) or 0 (the investment did not work).

 

Red came up six spins in a row; therefore the next spin will be red?

Of course not, the next spin will be EITHER red OR black (50% probability) - no matter how much history you have.

"Past performance is not a predictor of future performance"

 

The only exception is where physical laws apply.

Gravity always pulls things towards it, day follows night, etc.

 

SD

[aws]

Not to be overly rude, but certain posts in this thread (usually anytime to discussion drifts away from company fundamentals toward cognitive biases) bring to mind this great rejoinder from the movie Billy Madison:

 

Mr Madison, what you've just said is one of the most insanely idiotic things I've ever heard. At no point in your rambling, incoherent response was there anything that could even be considered a rational thought. Everyone in this room is now dumber for having listened to it. I award you no points, and may God have mercy on your soul.'