PWE - Penn West Petroleum

[Liberty]

Seems unlikely the CFO would resign if there was a great deal anywhere near on the horizon.

 

It’s always worrisome, if the guy running the numbers decides it’s not worth it.

 

I mean, it also was kind of a red flag that the company lost 99.8% of its value in the past few years, but that's not positive either...

[Gregmal]

Seems unlikely the CFO would resign if there was a great deal anywhere near on the horizon.

 

It’s always worrisome, if the guy running the numbers decides it’s not worth it.

 

I mean, it also was kind of a red flag that the company lost 99.8% of its value in the past few years, but that's not positive either...

 

LOL. You cant have a "if its "xyz", never/always invest" type of rules when investing, but you have to have parameters. That said, a ski slope type chart like this is as close to a "write it off immediately" for me as you can get.

[Liberty]

A fairly reliable double in 1 or even 2 years, for minimal work, is still a very good return. 

 

I'll make a note on my calendar to look again in a year.

 

As I said, it could spike up... or not. I don't see where the "reliable" part is, since people have been saying what you're saying since the beginning of this thread 4 years ago, and at the time it was considered already really cheap because it had just fallen 60-75%... To me that's more speculation than investment, hoping the volatility will go your way.

 

I had forgotten about this, but got a notification from my calendar. One day left for that "fairly reliable double".

 

From that date a year ago, the stock is down 88%.

[Joe689]

Well based on the debt/equity ratio this is officially becoming the 'coin flip'  It is either a zero or a double at this point.  What a disaster.

[SharperDingaan]

Look under the hood.

What the manic depressive claims, and what is actually there, are two very different things  ;)

 

SD

 

 

[Liberty]

Look under the hood.

What the manic depressive claims, and what is actually there, are two very different things  ;)

 

SD

 

Doesn't look that great under the hood, last I checked. What are you seeing?

 

Down another 26% in the past month... Soon enough you'll be able to buy the whole market cap by yourself, since you like it so much.

[SharperDingaan]

Look under the hood.

What the manic depressive claims, and what is actually there, are two very different things  ;)

 

SD

 

Doesn't look that great under the hood, last I checked. What are you seeing?

 

Down another 26% in the past month... Soon enough you'll be able to buy the whole market cap by yourself, since you like it so much.

 

I see either an announcement of a merger, a sale of an asset, or a termination of the strategic alternatives search. All good.

And that 26% thing? 24 cents canadian - or 8 cups of a Starbucks tall caffe latte, per 100 shares.

Not quite the same thing.

 

https://www.menuwithprice.com/menu/starbucks/ontario/toronto/132400/

 

SD

 

 

 

 

[Spekulatius]

Look under the hood.

What the manic depressive claims, and what is actually there, are two very different things  ;)

 

SD

 

Doesn't look that great under the hood, last I checked. What are you seeing?

 

Down another 26% in the past month... Soon enough you'll be able to buy the whole market cap by yourself, since you like it so much.

 

Or bankruptcy, which is what it looks like to me. Then you will have to find another way to earn the funds for your beach house in St Johns. - an area I really like to visit.

 

I see either an announcement of a merger, a sale of an asset, or a termination of the strategic alternatives search. All good.

And that 26% thing? 24 cents canadian - or 8 cups of a Starbucks tall caffe latte, per 100 shares.

Not quite the same thing.

 

https://www.menuwithprice.com/menu/starbucks/ontario/toronto/132400/

 

SD

[heth247]

Hi,

 

I did some modeling to see what does it take to put this company in BK. In every Q report, they give a metric called "Operating netback" per boe, which factor in sales price, hedges, royalties, transportation and operating costs, but not including SG&A. Fortunately they also include SG&A per boe separately. So I could estimate their approximate "operation cash flow" by:

  OCF = (average production / day) x (operating netback - SGA) x 365 - interest expense.

 

The reason to use this model than the FFO provided by the company is that, OBE's size and business has changed a lot over the past few years. With this one,  I can plug in the "operating netback" provided in their 2015/2016/2017/2018 report to get an idea what the operating cash flow would swing with existing business, when netbacks changes due to WTI price, differentials, and hedges. In 2019, their outlook is 27000 boe/day and about 2.2 boe for SGA.  So with different netbacks we have:

 

Using 2015 netback:

Operating cash flow = 27000 boe/day x (15.92-2.2) x 365 - 40M (interest) = $95M.

 

Using 2016 netback:

Operating cash flow = 27000 boe/day x (17.88-2.2) x 365 - 40M (interest) = $114M.

 

Using 2017 netback:

Operating cash flow = 27000 boe/day x (19.37-2.2) x 365 - 40M (interest) = $130M.

 

Using 2018 netback:

Operating cash flow = 27000 boe/day x (12.67-2.2) x 365 - 40M (interest) = $64M.

 

Using 2019 netback:

Operating cash flow = 27000 boe/day x (19.78-2.2) x 365 - 40M (interest) = $133M.

 

I did not model the "restructure and other expenses" in this model. Not sure if it is already included in the operating netback or how to normalize it.

 

The point is, based on the above numbers, if we assume we get a 2015 oil environment again, and they keep current production flat at 27000 boe/day, they may still generate $95M OCF. Currently their capex (including growth) is about $120M. If oil price goes down to $45, I would imagine them to cut the capex down to $80~100M, so they might still manage to be break even.  But with a mistake on hedges like 2018 again, that is gonna hurt badly.

 

Also, Joe689 pointed out that, after several years of restructuring and layoffs, their SGA might be even lower, and their production mix is more high netback light oil compared to several years ago.

 

Please let me know what you think. Thanks.

 

 

[Liberty]

I see either an announcement of a merger, a sale of an asset, or a termination of the strategic alternatives search. All good.

And that 26% thing? 24 cents canadian - or 8 cups of a Starbucks tall caffe latte, per 100 shares.

Not quite the same thing.

 

https://www.menuwithprice.com/menu/starbucks/ontario/toronto/132400/

 

SD

 

It's only 24 cents if you own only one share, or 8 cups of coffee if you own 100. How many do you own?

[SharperDingaan]

Hi,

 

I did some modeling to see what does it take to put this company in BK. In every Q report, they give a metric called "Operating netback" per boe, which factor in sales price, hedges, royalties, transportation and operating costs, but not including SG&A. Fortunately they also include SG&A per boe separately. So I could estimate their approximate "operation cash flow" by:

  OCF = (average production / day) x (operating netback - SGA) x 365 - interest expense.

 

The reason to use this model than the FFO provided by the company is that, OBE's size and business has changed a lot over the past few years. With this one,  I can plug in the "operating netback" provided in their 2015/2016/2017/2018 report to get an idea what the operating cash flow would swing with existing business, when netbacks changes due to WTI price, differentials, and hedges. In 2019, their outlook is 27000 boe/day and about 2.2 boe for SGA.  So with different netbacks we have:

 

Using 2015 netback:

Operating cash flow = 27000 boe/day x (15.92-2.2) x 365 - 40M (interest) = $95M.

 

Using 2016 netback:

Operating cash flow = 27000 boe/day x (17.88-2.2) x 365 - 40M (interest) = $114M.

 

Using 2017 netback:

Operating cash flow = 27000 boe/day x (19.37-2.2) x 365 - 40M (interest) = $130M.

 

Using 2018 netback:

Operating cash flow = 27000 boe/day x (12.67-2.2) x 365 - 40M (interest) = $64M.

 

Using 2019 netback:

Operating cash flow = 27000 boe/day x (19.78-2.2) x 365 - 40M (interest) = $133M.

 

I did not model the "restructure and other expenses" in this model. Not sure if it is already included in the operating netback or how to normalize it.

 

The point is, based on the above numbers, if we assume we get a 2015 oil environment again, and they keep current production flat at 27000 boe/day, they may still generate $95M OCF. Currently their capex (including growth) is about $120M. If oil price goes down to $45, I would imagine them to cut the capex down to $80~100M, so they might still manage to be break even.  But with a mistake on hedges like 2018 again, that is gonna hurt badly.

 

Also, Joe689 pointed out that, after several years of restructuring and layoffs, their SGA might be even lower, and their production mix is more high netback light oil compared to several years ago.

 

Please let me know what you think. Thanks.

 

SG&A is 60%+ lighter, interest expense is a few million lighter/year, and the mix is higher liquids/less gas. Going it alone, they really need 3 quarters of WTI averaging USD 70+, & no further screw-ups. All else equal at current prices; they can tread water, but to grow - they have to wait for either oil prices, or pipeline egress, to go their way. They can do nothing, and simply continue to operate; today's billion $ fields will automatically become worth more as conditions slowly improve.

 

Obviously, a good merger - and we get better and bigger quicker. OBE has accommodated, but the buyer has to make it worthwhile.

Sends the traders ballistic. OBE can't be forced to deal, and if there's no deal it kills next years M&A activity in the Cardium.

So put up some cattle, or take your 'big hat' home with you ....  ;)

 

SD

[SharperDingaan]

I see either an announcement of a merger, a sale of an asset, or a termination of the strategic alternatives search. All good.

And that 26% thing? 24 cents canadian - or 8 cups of a Starbucks tall caffe latte, per 100 shares.

Not quite the same thing.

 

https://www.menuwithprice.com/menu/starbucks/ontario/toronto/132400/

 

SD

 

It's only 24 cents if you own only one share, or 8 cups of coffee if you own 100. How many do you own?

 

Don't drink coffee, and don't need to sell :)

 

SD

[heth247]

 

SG&A is 60%+ lighter, interest expense is a few million lighter/year, and the mix is higher liquids/less gas. Going it alone, they really need 3 quarters of WTI averaging USD 70+, & no further screw-ups. All else equal at current prices; they can tread water, but to grow - they have to wait for either oil prices, or pipeline egress, to go their way. They can do nothing, and simply continue to operate; today's billion $ fields will automatically become worth more as conditions slowly improve.

 

Obviously, a good merger - and we get better and bigger quicker. OBE has accommodated, but the buyer has to make it worthwhile.

Sends the traders ballistic. OBE can't be forced to deal, and if there's no deal it kills next years M&A activity in the Cardium.

So put up some cattle, or take your 'big hat' home with you ....  ;)

 

SD

 

SD, I am more worried about WTI going down than going up, and was trying to see if OBE can survive it for how long. What are your thoughts?

[SharperDingaan]

OBE just continues to live within its FFO. WTI goes down, FFO goes down, and OBE just reduces their capex.

Alternatively, management temporarily puts the company into run-off and just diverts the FFO into debt reduction.

The market hates them already - so nothing really lost.

Checkmate.

 

The reality is that markets are short-term orientated; and that to make any real money here, OBE MUST transact. The problem is that OBE DOES NOT HAVE TO transact, and if it simply zombies along - it will still do very well. Pipelines will eventually get built, pricing will eventually normalize, and the value of their assets will materially rise; albeit, maybe not today.

 

To remove the checkmate, OBE HAS to get bought out.

The market hates that it can't be done cheap, people are screwing with the deal, and that the muppet can't be forced to transact.

.... And that competitors are now scooping the cheap shares as well.

 

The banks just renewed OBE's credit line until at least Nov 30,2020, without any cuts.

If you don't need to sell, and can afford to wait, there's not a lot of risk at the current share price.

And every day, a great many people are working very hard - to offer you those same shares at a lower price! 

What's not to love  ;)

 

SD

 

 

 

[heth247]

OBE just continues to live within its FFO. WTI goes down, FFO goes down, and OBE just reduces their capex.

Alternatively, management temporarily puts the company into run-off and just diverts the FFO into debt reduction.

The market hates them already - so nothing really lost.

Checkmate.

 

The reality is that markets are short-term orientated; and that to make any real money here, OBE MUST transact. The problem is that OBE DOES NOT HAVE TO transact, and if it simply zombies along - it will still do very well. Pipelines will eventually get built, pricing will eventually normalize, and the value of their assets will materially rise; albeit, maybe not today.

 

To remove the checkmate, OBE HAS to get bought out.

The market hates that it can't be done cheap, people are screwing with the deal, and that the muppet can't be forced to transact.

.... And that competitors are now scooping the cheap shares as well.

 

The banks just renewed OBE's credit line until at least Nov 30,2020, without any cuts.

If you don't need to sell, and can afford to wait, there's not a lot of risk at the current share price.

And every day, a great many people are working very hard - to offer you those same shares at a lower price! 

What's not to love  ;)

 

SD

 

Do you have an estimation how much capex they can cut down without suffering FFO? Or what is their minimum capex?

 

If I assume overall depletion rate is 15%, then for 27000 boe/d that is about 4000 boe/d. The company's sensitivity analysis says for every 1000 boe/d, the impact on cash flow is $16M. So 4000 equal to $64M, that is a lot compared to FFO ($150M). I am not sure if they can put the company in that kind of run off mode.

 

They will have $36M senior notes due in 2020 in addition to the annual credit facility renewal. If FFO goes down in 2020, how are they going to pay for it, given that they already max out their leverage ratio?

 

 

[SharperDingaan]

Look at liquids production, where it’s from, and Q3 2019. There were no additions in Q3 and liquids declined by 1,858 boe/day. Look at the Q3 2019 reporting for information on production additions – Cardium phase II additions cost roughly 4.25M/well and deliver an average 263 boe/d in the first 10 days. Maintenance capex is roughly 64M.

 

Look at the well curves, the formation, and the decline rates. Decline is primarily from the gas cut, which is around 45% on a 1st yr Cardium well. The day-10, 263 boe/d well is producing 144 boe/d liquids at the end of yr1 + 118 boe/d of equivalent gas. Gas sold as a by-product at AECO prices, for proceeds that REDUCE maintenance capex.

 

Look at price decks. This industry is all about the operating leverage, and the break-evens in the various formations; a small change in WTI, gas price, differentials, or FX has a material impact. A small change in throughput (consolidation) has a material impact.

 

Look at the business logic. Cardium wells cost roughly 16K/flowing boe/d – before by-product and scaling reductions. Comps per OBE’s ‘high liquids’ wells, suggest they are worth roughly 65K/flowing boe/d; Q3 netbacks imply a payback period of roughly 2 yrs. And all under Q3’s sh1te pricing. 

 

Sure, they need higher oil prices, but they aren’t the basket case the sell side likes to claim. Anyone can buy them out, but they are going to have to share the wealth.

 

SD

 

[Liberty]

Don't drink coffee, and don't need to sell :)

 

SD

 

Best of luck

[blainehodder]

This thread is an extremely valuable documentation of the bagholding mentality of justifying one's holdings no matter how terrible they perform fundamentally and price-wise. Zero risk management leads to holding clear zeros on pie in the sky dreams of enormous turnarounds.

 

Use stops. Use common sense. You need a process to cut losers - if not when the price is telling you to cut them, at least when revenues and cash flows implode.

 

 

[SharperDingaan]

Agreed there are a number of valuable lessons here, but lets wait until the dealings done.

 

SD

[Pauly]

It's very Pythonesque. SD telling everyone "'tis but a scratch", and then having another limb lopped off.

 

Anytime I feel the urge to invest in a commodity business I just revisit this thread to remind myself how easy it is for seemingly knowledgeable people to have their dollars turned into pennies.

[SharperDingaan]

It's very Pythonesque. SD telling everyone "'tis but a scratch", and then having another limb lopped off.

 

Anytime I feel the urge to invest in a commodity business I just revisit this thread to remind myself how easy it is for seemingly knowledgeable people to have their dollars turned into pennies.

 

The business view and the trading view (stops, loss cover, etc) are two very different things.

I just recognize that in a sale of the business (or pieces thereof), the business valuation will prevail, and that the share price will reflect that valuation at the time the transaction occurs. Until then the share price just reflects the days market speculation, expressed as supply/demand for the shares.

 

If you think the market is right, you shouldn't be here. If you think the market is wrong, it's an opportunity.

I see a market view which says that anything to do with WCSB o/g is utter sh1te, and is pricing accordingly, at historic lows. Yet I also see lots of small/intermediate WCSB operators, continuing to run profitable but struggling companies, that prove otherwise, and on a daily basis. If the market is right there should have been lots of WCSB bankruptcies; whereas the facts are that there have been some - but a lot fewer than expected.

 

We just hold a different, and very unpopular view.

 

SD

 

 

 

[heth247]

Look at liquids production, where it’s from, and Q3 2019. There were no additions in Q3 and liquids declined by 1,858 boe/day. Look at the Q3 2019 reporting for information on production additions – Cardium phase II additions cost roughly 4.25M/well and deliver an average 263 boe/d in the first 10 days. Maintenance capex is roughly 64M.

 

Look at the well curves, the formation, and the decline rates. Decline is primarily from the gas cut, which is around 45% on a 1st yr Cardium well. The day-10, 263 boe/d well is producing 144 boe/d liquids at the end of yr1 + 118 boe/d of equivalent gas. Gas sold as a by-product at AECO prices, for proceeds that REDUCE maintenance capex.

 

Look at price decks. This industry is all about the operating leverage, and the break-evens in the various formations; a small change in WTI, gas price, differentials, or FX has a material impact. A small change in throughput (consolidation) has a material impact.

 

Look at the business logic. Cardium wells cost roughly 16K/flowing boe/d – before by-product and scaling reductions. Comps per OBE’s ‘high liquids’ wells, suggest they are worth roughly 65K/flowing boe/d; Q3 netbacks imply a payback period of roughly 2 yrs. And all under Q3’s sh1te pricing. 

 

Sure, they need higher oil prices, but they aren’t the basket case the sell side likes to claim. Anyone can buy them out, but they are going to have to share the wealth.

 

SD

 

SD, where do you get the 65K/flowing boe/d comp?

[nodnub]

It's very Pythonesque. SD telling everyone "'tis but a scratch", and then having another limb lopped off.

 

Anytime I feel the urge to invest in a commodity business I just revisit this thread to remind myself how easy it is for seemingly knowledgeable people to have their dollars turned into pennies.

 

The business view and the trading view (stops, loss cover, etc) are two very different things.

I just recognize that in a sale of the business (or pieces thereof), the business valuation will prevail, and that the share price will reflect that valuation at the time the transaction occurs. Until then the share price just reflects the days market speculation, expressed as supply/demand for the shares.

 

If you think the market is right, you shouldn't be here. If you think the market is wrong, it's an opportunity.

I see a market view which says that anything to do with WCSB o/g is utter sh1te, and is pricing accordingly, at historic lows. Yet I also see lots of small/intermediate WCSB operators, continuing to run profitable but struggling companies, that prove otherwise, and on a daily basis. If the market is right there should have been lots of WCSB bankruptcies; whereas the facts are that there have been some - but a lot fewer than expected.

 

We just hold a different, and very unpopular view.

 

SD

 

Sharper, what do you think of the risk of the following scenario...  Say for example that the share price drops 50% from here (from $0.60 to $0.30) and then management makes a buyout offer for $0.40 (33% premium over $0.30 price).  Does a deal happen?  Do the minority shareholders get forced out?   

 

I saw that Fibrek shareholder lawsuit was successful.  How many years ago was the buyout?  Who here can wait that long?

[SharperDingaan]

Look at liquids production, where it’s from, and Q3 2019. There were no additions in Q3 and liquids declined by 1,858 boe/day. Look at the Q3 2019 reporting for information on production additions – Cardium phase II additions cost roughly 4.25M/well and deliver an average 263 boe/d in the first 10 days. Maintenance capex is roughly 64M.

 

Look at the well curves, the formation, and the decline rates. Decline is primarily from the gas cut, which is around 45% on a 1st yr Cardium well. The day-10, 263 boe/d well is producing 144 boe/d liquids at the end of yr1 + 118 boe/d of equivalent gas. Gas sold as a by-product at AECO prices, for proceeds that REDUCE maintenance capex.

 

Look at price decks. This industry is all about the operating leverage, and the break-evens in the various formations; a small change in WTI, gas price, differentials, or FX has a material impact. A small change in throughput (consolidation) has a material impact.

 

Look at the business logic. Cardium wells cost roughly 16K/flowing boe/d – before by-product and scaling reductions. Comps per OBE’s ‘high liquids’ wells, suggest they are worth roughly 65K/flowing boe/d; Q3 netbacks imply a payback period of roughly 2 yrs. And all under Q3’s sh1te pricing. 

 

Sure, they need higher oil prices, but they aren’t the basket case the sell side likes to claim. Anyone can buy them out, but they are going to have to share the wealth.

 

SD

 

SD, where do you get the 65K/flowing boe/d comp?

 

https://www.inplayoil.com/sites/2/files/documents/press_release_sept_2018_-_disposition_increased_capex_and_guidance_-_final.pdf

This is Sep-2018, 72% liquids, at West Pembina. There are others in the Cardium as well, with similar liquids content, and the same year. The numbers are not definitive, but there are hard evidence (not guesses) as to what high liquids Cardium production, is actually worth.

 

SD

[SharperDingaan]

It's very Pythonesque. SD telling everyone "'tis but a scratch", and then having another limb lopped off.

 

Anytime I feel the urge to invest in a commodity business I just revisit this thread to remind myself how easy it is for seemingly knowledgeable people to have their dollars turned into pennies.

 

The business view and the trading view (stops, loss cover, etc) are two very different things.

I just recognize that in a sale of the business (or pieces thereof), the business valuation will prevail, and that the share price will reflect that valuation at the time the transaction occurs. Until then the share price just reflects the days market speculation, expressed as supply/demand for the shares.

 

If you think the market is right, you shouldn't be here. If you think the market is wrong, it's an opportunity.

I see a market view which says that anything to do with WCSB o/g is utter sh1te, and is pricing accordingly, at historic lows. Yet I also see lots of small/intermediate WCSB operators, continuing to run profitable but struggling companies, that prove otherwise, and on a daily basis. If the market is right there should have been lots of WCSB bankruptcies; whereas the facts are that there have been some - but a lot fewer than expected.

 

We just hold a different, and very unpopular view.

 

SD

 

Sharper, what do you think of the risk of the following scenario...  Say for example that the share price drops 50% from here (from $0.60 to $0.30) and then management makes a buyout offer for $0.40 (33% premium over $0.30 price).  Does a deal happen?  Do the minority shareholders get forced out?   

 

I saw that Fibrek shareholder lawsuit was successful.  How many years ago was the buyout?  Who here can wait that long?

 

This is a traders view, not the business valuation view.

 

Whatever deal, and whoever makes it, the transaction has to be approved by the BOD. By law, the BOD is required to evidence their DD, and that the proposed deal was the highest and best alternative at the time. The bank has not foreclosed on them, business as usual is the base-line, and the value of a business generating 120M+ of FFO/year is what has to beaten. If a buyer just wants an asset package, the buyer has to offer more than what OBE is already making from that package. The prevailing share price, and the markets view of OBE, has very little to do with it.

 

SD