PWE - Penn West Petroleum

[plato1976]

I guess you are fine with the extreme senario in which the low oil price lingers for more than 3 years and PWE cannot sell its non-core assets and run into a solvent issues ...

 

I also bought my first SD, XOM, LUKOY, OGZPY.  All today.  Something I bought will get slaughtered no doubt -- probably not XOM though.  60% of the money went into PWE, 20% into XOM, the other 3 split evenly.

[ERICOPOLY]

I guess you are fine with the extreme senario in which the low oil price lingers for more than 3 years and PWE cannot sell its non-core assets and run into a solvent issues ...

 

I also bought my first SD, XOM, LUKOY, OGZPY.  All today.  Something I bought will get slaughtered no doubt -- probably not XOM though.  60% of the money went into PWE, 20% into XOM, the other 3 split evenly.

 

The scenario you mention was just as real when oil traded above $100.  High price produces profitable drilling of expensive oil -- this raises supply and that can lead to lower prices.  They even have a term for this "shale boom" and much has been written about it.  The difference is that now we have better risk/reward because there is much more upside if that oilmageddon doesn't play out.

 

The PWE investment is 2% of my total net worth.  I can increase into the remaining survivors when the end draws nigh.

 

So I'm still acting cautious.

 

 

[plato1976]

:) Well said !

let us know when you make a major bet into this sector... !!

 

I guess you are fine with the extreme senario in which the low oil price lingers for more than 3 years and PWE cannot sell its non-core assets and run into a solvent issues ...

 

I also bought my first SD, XOM, LUKOY, OGZPY.  All today.  Something I bought will get slaughtered no doubt -- probably not XOM though.  60% of the money went into PWE, 20% into XOM, the other 3 split evenly.

 

The scenario you mention was just as real when oil traded above $100.  High price produces profitable drilling of expensive oil -- this raises supply and that can lead to lower prices.  They even have a term for this "shale boom" and much has been written about it.  The difference is that now we have better risk/reward because there is much more upside if that oilmageddon doesn't play out.

 

The PWE investment is 2% of my total net worth.  I can increase into the remaining survivors when the end draws nigh.

 

So I'm still acting cautious.

[Scudbucket]

I agree with Ericopoly, the risk/reward is much different now than at $100.  If you believe investing is a probabilistic endeavor, which I do, then yes, at this price, long-term, I think it is an attractive opportunity.  Of course, the outcome may not be good, but the important thing is the process and thinking that goes into the decision.  You never get everything right, but as long as the process is sound, over time, hopefully you tilt the odds so you're right 60% of the time.  If you do that, over and over, I think you'll be fine.

[alertmeipp]

>>the risk/reward is much different now than at $100

 

true if you have good read on oil price going forward.

[ERICOPOLY]

>>the risk/reward is much different now than at $100

 

true if you have good read on oil price going forward.

 

And I don't.  Which is why I'm not willing to pass up on buying today.  Yet not willing to let it get too expensive.

[alertmeipp]

>>the risk/reward is much different now than at $100

 

true if you have good read on oil price going forward.

 

And I don't.  Which is why I'm not willing to pass up on buying today.  Yet not willing to let it get too expensive.

 

Smart man. All I have to do all along was to start copying your moves few years ago. Life would be so much better now. :)

 

[adesigar]

I also bought my first SD, XOM, LUKOY, OGZPY.  All today.  Something I bought will get slaughtered no doubt -- probably not XOM though.  60% of the money went into PWE, 20% into XOM, the other 3 split evenly.

 

What was your rational behind 60% into PWE vs an equal split? What do you think is a fair value range for PWE?

 

After Enron and World Com I put equal amounts in the survivors, some went to zero but the winners more than made up for it.

 

 

 

 

 

[ERICOPOLY]

I also bought my first SD, XOM, LUKOY, OGZPY.  All today.  Something I bought will get slaughtered no doubt -- probably not XOM though.  60% of the money went into PWE, 20% into XOM, the other 3 split evenly.

 

What was your rational behind 60% into PWE vs an equal split? What do you think is a fair value range for PWE?

 

After Enron and World Com I put equal amounts in the survivors, some went to zero but the winners more than made up for it.

 

I defer to the rest of the thread as to where fair value is for PWE -- it all depends on whether this is a temporary or permanent oil price.  If T. Boone Pickens is right, I may have a 10x return. 

 

I bought the others in smaller amounts because of various reasons.

 

[thepupil]

Are any of those debt/bond traded on the exchange allowing people to buy via normal brokers?  Does anyone have a list of exchange traded debt/bond? 

 

well I don't really know of any bonds that are "exchange traded" with the exception of like baby bond GE retail notes or something. But you can still buy bonds through your broker.

 

you can buy everyone  i mentioned (XCO, SD, PGN) on IB, except for EOX converts which are 144A (so only for QIB's). An author on VIC says PGN unsecureds are a zero so $55 may turn out to be very expensive!!! 

 

the energy high yield universe has widened out by 300 bps to 8.5% YTM (energy is 20% of HY btw so that whole "we are in an era of 1% junk default rates" thing may a little off  ;D )  but the more hairy names are at mid teens yields.

 

 

 

 

[ItsAValueTrap]

And to my untrained and admittedly ignorant of the ways of oil and gas self it doesn't really look all that distressed. Penn West has $7.7B of tangible assets and a $4B EV with its maturities well termed out and plenty of growth capex and dividends to cut to avoid an all out fire sale in order to delever. the dividend alone would cover their interest costs, so just cut that bitch to zero and use the saved cash flow to service the debt, and maybe stop trying to grow production by 40% over 5 years.

 

Anyways that's my ignorant Penn West thesis : cut dividend, lower capex, sell some assets at "not quite firesale", balance sheet problem solved then wait for turn in cycle.

 

you can buy everyone  i mentioned (XCO, SD, PGN) on IB, except for EOX converts which are 144A (so only for QIB's). An author on VIC says PGN unsecureds are a zero so $55 may turn out to be very expensive!!! 

 

You think AAMC is crooked but not EOX, SD, etc. ? 

 

In my opinion, I would put stocks in the following tiers based on integrity (highest to lowest):

 

BRK.A

 

AAMC and KMI (pre-merger KMI)

 

XOM/Exxon, MCF

 

CLR, Peyto

 

SD CHK

 

Average piece of **** smallcap independent E&P.  e.g. REXX. 

 

Worldcom, Penn West

 

EOX, MILL    yes, EOX is worse than Worldcom.

 

-----------

 

Guys... a lot of these stocks have terrible management teams.  The ones that sold off the most have the worst management teams.  They are the ones who deceive shareholders the most.

 

You know that the typical independent E&P inflates their reserves right?

[plato1976]

A company like CHK in the U.S. has to drill to hold the lease

Does PWE have the same issue? Can it stop drilling those uneconomic wells under the current price without losing the lease?

 

Are any of those debt/bond traded on the exchange allowing people to buy via normal brokers?  Does anyone have a list of exchange traded debt/bond? 

 

well I don't really know of any bonds that are "exchange traded" with the exception of like baby bond GE retail notes or something. But you can still buy bonds through your broker.

 

you can buy everyone  i mentioned (XCO, SD, PGN) on IB, except for EOX converts which are 144A (so only for QIB's). An author on VIC says PGN unsecureds are a zero so $55 may turn out to be very expensive!!! 

 

the energy high yield universe has widened out by 300 bps to 8.5% YTM (energy is 20% of HY btw so that whole "we are in an era of 1% junk default rates" thing may a little off  ;D )  but the more hairy names are at mid teens yields.

[thepupil]

And to my untrained and admittedly ignorant of the ways of oil and gas self it doesn't really look all that distressed. Penn West has $7.7B of tangible assets and a $4B EV with its maturities well termed out and plenty of growth capex and dividends to cut to avoid an all out fire sale in order to delever. the dividend alone would cover their interest costs, so just cut that bitch to zero and use the saved cash flow to service the debt, and maybe stop trying to grow production by 40% over 5 years.

 

Anyways that's my ignorant Penn West thesis : cut dividend, lower capex, sell some assets at "not quite firesale", balance sheet problem solved then wait for turn in cycle.

 

you can buy everyone  i mentioned (XCO, SD, PGN) on IB, except for EOX converts which are 144A (so only for QIB's). An author on VIC says PGN unsecureds are a zero so $55 may turn out to be very expensive!!! 

 

You think AAMC is crooked but not EOX, SD, etc. ? 

 

In my opinion, I would put stocks in the following tiers based on integrity (highest to lowest):

 

BRK.A

 

AAMC and KMI (pre-merger KMI)

 

XOM/Exxon, MCF

 

CLR, Peyto

 

SD CHK

 

Average piece of **** smallcap independent E&P.  e.g. REXX. 

 

Worldcom, Penn West

 

EOX, MILL    yes, EOX is worse than Worldcom.

 

-----------

 

Guys... a lot of these stocks have terrible management teams.  The ones that sold off the most have the worst management teams.  They are the ones who deceive shareholders the most.

 

You know that the typical independent E&P inflates their reserves right?

 

I have no opinions on any of those (SD, EOX etc.) I only brought them up to point out what I saw as a pricing anomaly. This priced for future distress guys in the US bonds have all traded down significantly and PWE's are all marked at par on Bloomberg. I have investigated this but could not find a US investment bank that trades those bonds (or at least they are not sent out on normal energy runs that the dealers send out). That's all I was saying. Then someone asked about the ability to buy bonds and I said you could buy those crappy company bonds till your hearts desire; IB allows you to do so, except the EOX converts were 144A. I never expressed an opinion about crookedness.

 

I have a small position in PWE and PWE options because I like leverage on  leverage on leverage on stocks that are down 70% and look like they can survive; $2B of debt doesn't seem insurmountable. May I lose my shirt on the position? Oh yes!It is sized as such. PWE looks like it was a giant piece of shit of a  company under old management and new management's ridiculous stubbornness about the dividend that should immediately be cut to zero isn't exactly confidence inspiring.

[thepupil]

oh and bill erbey sucks  ;D

[ItsAValueTrap]

oh and bill erbey sucks  ;D

 

Touche.

[thepupil]

but in all seriousness, Glenn, it would be great to hear your perspective on the independent oil and gas names. What names are you covering first? Are you pressing any particular shorts? Who do you think kicks the bucket first? Are there any out there you would buy? I mean if there's anyone here who is intimate with the wonderful world of no value creating independent e+p companies, it is you.

 

EDIT: Nevermind, it's getting late and I forgot to check your blog

 

[argonaut]

@ericopoly any thoughts on CHK?

[ERICOPOLY]

@ericopoly any thoughts on CHK?

 

I haven't read that thread yet.

[sswan11]

How about BP?

[Uccmal]

And to my untrained and admittedly ignorant of the ways of oil and gas self it doesn't really look all that distressed. Penn West has $7.7B of tangible assets and a $4B EV with its maturities well termed out and plenty of growth capex and dividends to cut to avoid an all out fire sale in order to delever. the dividend alone would cover their interest costs, so just cut that bitch to zero and use the saved cash flow to service the debt, and maybe stop trying to grow production by 40% over 5 years.

 

Anyways that's my ignorant Penn West thesis : cut dividend, lower capex, sell some assets at "not quite firesale", balance sheet problem solved then wait for turn in cycle.

 

you can buy everyone  i mentioned (XCO, SD, PGN) on IB, except for EOX converts which are 144A (so only for QIB's). An author on VIC says PGN unsecureds are a zero so $55 may turn out to be very expensive!!! 

 

You think AAMC is crooked but not EOX, SD, etc. ? 

 

In my opinion, I would put stocks in the following tiers based on integrity (highest to lowest):

 

BRK.A

 

AAMC and KMI (pre-merger KMI)

 

XOM/Exxon, MCF

 

CLR, Peyto

 

SD CHK

 

Average piece of **** smallcap independent E&P.  e.g. REXX. 

 

Worldcom, Penn West

 

EOX, MILL    yes, EOX is worse than Worldcom.

 

-----------

 

Guys... a lot of these stocks have terrible management teams.  The ones that sold off the most have the worst management teams.  They are the ones who deceive shareholders the most.

 

You know that the typical independent E&P inflates their reserves right?

 

You rate Pennwest with Worldcom?  Why is that?  That is quite an assertion with no proof and no apparent analysis. 

 

I agree on SD, and CHK

[ERICOPOLY]

And to my untrained and admittedly ignorant of the ways of oil and gas self it doesn't really look all that distressed. Penn West has $7.7B of tangible assets and a $4B EV with its maturities well termed out and plenty of growth capex and dividends to cut to avoid an all out fire sale in order to delever. the dividend alone would cover their interest costs, so just cut that bitch to zero and use the saved cash flow to service the debt, and maybe stop trying to grow production by 40% over 5 years.

 

Anyways that's my ignorant Penn West thesis : cut dividend, lower capex, sell some assets at "not quite firesale", balance sheet problem solved then wait for turn in cycle.

 

you can buy everyone  i mentioned (XCO, SD, PGN) on IB, except for EOX converts which are 144A (so only for QIB's). An author on VIC says PGN unsecureds are a zero so $55 may turn out to be very expensive!!! 

 

You think AAMC is crooked but not EOX, SD, etc. ? 

 

In my opinion, I would put stocks in the following tiers based on integrity (highest to lowest):

 

BRK.A

 

AAMC and KMI (pre-merger KMI)

 

XOM/Exxon, MCF

 

CLR, Peyto

 

SD CHK

 

Average piece of **** smallcap independent E&P.  e.g. REXX. 

 

Worldcom, Penn West

 

EOX, MILL    yes, EOX is worse than Worldcom.

 

-----------

 

Guys... a lot of these stocks have terrible management teams.  The ones that sold off the most have the worst management teams.  They are the ones who deceive shareholders the most.

 

You know that the typical independent E&P inflates their reserves right?

 

You rate Pennwest with Worldcom?  Why is that?  That is quite an assertion with no proof and no apparent analysis. 

 

I agree on SD, and CHK

 

I figure he is referring to the expenses that were capitalized to juice reported earnings.  I chalked it up to old management.

[ERICOPOLY]

How about BP?

 

Didn't think of looking there yet.

 

[ItsAValueTrap]

You rate Pennwest with Worldcom?  Why is that?  That is quite an assertion with no proof and no apparent analysis. 

 

I agree on SD, and CHK

 

It's an opinion.  I'm not impressed by their old accounting.

 

I shorted both SD and CHK briefly (before the collapse in their share prices).

[tyska]

And to my untrained and admittedly ignorant of the ways of oil and gas self it doesn't really look all that distressed. Penn West has $7.7B of tangible assets and a $4B EV with its maturities well termed out and plenty of growth capex and dividends to cut to avoid an all out fire sale in order to delever. the dividend alone would cover their interest costs, so just cut that bitch to zero and use the saved cash flow to service the debt, and maybe stop trying to grow production by 40% over 5 years.

 

Anyways that's my ignorant Penn West thesis : cut dividend, lower capex, sell some assets at "not quite firesale", balance sheet problem solved then wait for turn in cycle.

 

you can buy everyone  i mentioned (XCO, SD, PGN) on IB, except for EOX converts which are 144A (so only for QIB's). An author on VIC says PGN unsecureds are a zero so $55 may turn out to be very expensive!!! 

 

You think AAMC is crooked but not EOX, SD, etc. ? 

 

In my opinion, I would put stocks in the following tiers based on integrity (highest to lowest):

 

BRK.A

 

AAMC and KMI (pre-merger KMI)

 

XOM/Exxon, MCF

 

CLR, Peyto

 

SD CHK

 

Average piece of **** smallcap independent E&P.  e.g. REXX. 

 

Worldcom, Penn West

 

EOX, MILL    yes, EOX is worse than Worldcom.

 

-----------

 

Guys... a lot of these stocks have terrible management teams.  The ones that sold off the most have the worst management teams.  They are the ones who deceive shareholders the most.

 

You know that the typical independent E&P inflates their reserves right?

 

I have no opinions on any of those (SD, EOX etc.) I only brought them up to point out what I saw as a pricing anomaly. This priced for future distress guys in the US bonds have all traded down significantly and PWE's are all marked at par on Bloomberg. I have investigated this but could not find a US investment bank that trades those bonds (or at least they are not sent out on normal energy runs that the dealers send out). That's all I was saying. Then someone asked about the ability to buy bonds and I said you could buy those crappy company bonds till your hearts desire; IB allows you to do so, except the EOX converts were 144A. I never expressed an opinion about crookedness.

 

I have a small position in PWE and PWE options because I like leverage on  leverage on leverage on stocks that are down 70% and look like they can survive; $2B of debt doesn't seem insurmountable. May I lose my shirt on the position? Oh yes!It is sized as such. PWE looks like it was a giant piece of shit of a  company under old management and new management's ridiculous stubbornness about the dividend that should immediately be cut to zero isn't exactly confidence inspiring.

 

What am I missing with everyone promoting that the div should be cut. Last numbers I saw, unless it has changed recently, the div was a very small cash cost to the company. Yeh it's diluting the shares, but so are all the options that they keep putting out, yet you hardly hear a boo of concern about that with the price fall. My understanding is the short shares are the ones that have to come up with the cash for the div on the shares they are short, please correct me if my understanding of  that is incorrect.

[thepupil]

My uninformed opinion:

 

the stock is distressed. EV / Tangible Assets is about $4B / $7.7B = 51%, and price to tangible equity is 28%. At current prices,  they don't have the cash flow to service and pay down debt, pay dividends, and fund the desired capex program (as pointed out in earlier posts).

 

the market is valuing this company's assets at 51 cents on the dollar  and the common allows you to buy the first loss tranche for 28 cents on the dollar using the debt as leverage. the options market in turn allows you to lever that first loss tranche (for example I sold the $1.00 put and bought the $3.00 call for a net cost of $.65, so my risk is $1.65 if this is a goose egg (not unlikely) and my home run scenario is its worth $8.00 or even $10.00 in which case my call is worth $5-$7 on $1.65 of risk (300-420%). The crazy home run scenario is even better, of course, but I'm not going to even go there.

 

So how do you lose money buying distressed assets?

 

1) the assets ain't worth what they say they are. former management manipulated earnings and gross assets (before depletion and depreciation) ballooned from $3B to $20B over 10 yrs (lots of acquisitions and capex), they probably overpaid for a ton of stuff and just bought baby bought and drilled baby drilled, they were serial equity and debt issuers and we already have seen a couple cockroaches.

 

2) they are forced to sell assets below fair value to pay down debt and that dollar you bought for 50 cents was sold for 30 cents.

 

3) they do a massive dilutive equity offering to save their ass and stay in their positions and prevailing market prices drag per share intrinsic value down

 

4) oil collapses further stays down there and all bets are off

 

 

Giving cash to shareholders in the form of a dividend only de-risks the shareholders' position by the amount paid and makes the company weaker and the disaster scenarios more likely. I don't want to get paid 17% for 2 years just to lose 100% when they can't roll over their debt and fund maintenance capex and file in order to get out of it.

 

When you are in a distressed situation, you need to prevent a forced reckoning at all costs. The dividend just isn't compatible with the current situation (unless the stock market is just completely off and PWE is doing just fine; I've yet to see this argument and looking at the financials doesn't make me think that).

 

I don't understand this idea of "paying people to be in the story". The story has changed. The capital markets have effectively shunned you from raising equity by marking down your stock by 70% and we don't know how debt guys will feel about refinancing them (since I can't find real bond prices).

 

Any cash used to pay shareholders increases the likelihood of future destruction. I'd love to hear an argument for the dividend. All I've done is read this thread, skimmed over the guru focus 10 yr financials, the recent news and a few of the more recent financial filings. It's a small hyper levered position from which I expect future pain.