PWE - Penn West Petroleum

[Packer16]

I think the issue is that the dividend costs $220 million per year.  With $90 oil, they generate about $930m in CFO and have $840 m in cap-ex planned.  However with $70 oil, the CFO declines to an estimated $530 m (not enough to cover cap-ex (which includes growth) and current divy).  Based upon there latest plan about $100m cap-ex is maintenance (which I am assuming means declining production from existing fields).  The estimate production growth with the $750 m cap-ex is 8% per year on a BoE basis.  The question in my mind is how much growth is cut back if growth cap-ex is closer to $430 m per year.  They clearly have the ability to slow the growth and maintain the dividend which is what they should do if the prices stay low in any case.

 

Packer

[ERICOPOLY]

The 2017 $3 strike put (9 cents in the money) has a $1.50 "ask". 

 

I might add that if they raise the annual dividend to 71 cents and cut back harder on capex, you've got a completely free option.

 

So is cutting the dividend back really what's best for you?

[thepupil]

dividend raise? options market already implies a massive cut. If you think they're going to raise and maintain for 2 years, be my guest and buy the put, you'll make a killing.

 

Why is capital return (divvy or buyback) the appropriate action for a levered commodity producer that just saw its commodity drop by 40%?

 

Imagine you were invested in a levered hedge fund..."We have experienced massive mark to market losses and all future additions by existing LP's have been canceled. We've decided that the right thing to do is maintain all our positions and give you back 20% of your remaining capital and get more levered"

 

I'd want to get back 100% of my capital and would think the GP was a nut. When you are too levered and start losing big , you reduce gross: sell longs (oil assets in this instance) and cover shorts (debt in this instance)...you don't want to get a margin call (BK, forced fire sales) and realize losses on the entire portfolio at the bottom.

[plato1976]

I suppose the CFO is before paying interests? They have some debt so they need to pay interests also

 

I think the issue is that the dividend costs $220 million per year.  With $90 oil, they generate about $930m in CFO and have $840 m in cap-ex planned.  However with $70 oil, the CFO declines to an estimated $530 m (not enough to cover cap-ex (which includes growth) and current divy).  Based upon there latest plan about $100m cap-ex is maintenance (which I am assuming means declining production from existing fields).  The estimate production growth with the $750 m cap-ex is 8% per year on a BoE basis.  The question in my mind is how much growth is cut back if growth cap-ex is closer to $430 m per year.  They clearly have the ability to slow the growth and maintain the dividend which is what they should do if the prices stay low in any case.

 

Packer

[ERICOPOLY]

dividend raise? options market already implies a massive cut. If you think they're going to raise and maintain for 2 years, be my guest and buy the put, you'll make a killing.

 

What gives you the impression that I believe they will raise or maintain the dividend? 

 

Is it because I pointed out that a higher dividend would cover the current cost of hedging?

 

You could find worse things to worry about than free hedging.

[thepupil]

I might add that if they raise the annual dividend to 71 cents and cut back harder on capex, you've got a completely free option.

 

I don't think you do. But you said that if they raise it that put is free. That put ain't going to be free if/when they cut. I'd be more inclined to sell puts/buy calls (take a stance against the dividend) than to bet on continued dividend.

 

I worry about them keeping the dividend and endangering the company and making disaster more likely. I don't really worry about upside or growth. All they need to do is ensure survival and we win. Dividend incrementally decreases chance of survival.

 

 

[ERICOPOLY]

If

 

;) ;) ;)

 

Okay, now where were we...

 

Someone pointed out the dividend policy as a risk.  I'm merely showing how the "risk" is in the eye of the beholder.

 

If it's a risk then hedge for it, and then be pleasantly surprised at how what once seemed like a risk is actually the opposite.  The risk then becomes if they cut it. 

 

The ideal scenario is you worry so bad about management that you hedge for it, and then you are relieved to find out that the management turns out to be far worse than you thought and actually raises the dividend.

 

So if one's mind is made up either way about the dividend, it's not a reason to avoid the name.

 

It becomes harder if you can't read them, like me.

[thepupil]

yep, I think we agree that what management does with the divvy is uncertain and a risk.

 

I am indeed taking the risk that they maintain the dividend because I sold puts to buy calls (so greater than expected dividends will hurt my performance relative to other ways of being long).

 

I'm not avoiding the name. I own it despite my worries because I think it's priced for very very high upside if the disaster scenario does not play out.

 

My interests, as a just bought in shareholder with no hangups about where the stock or dividend was or has been, is simply for the company to hunker down, reduce the likelihood of Armageddon, and reprice the stock from "holy shit this is going bankrupt and they are going to fire sale all their assets" to "ooohh some assets at a discount with the balance sheet problem solved". That's our event path to the first 100%, in my opinion and that's why I'm so adamantly against the divvy.

 

If they can  do it all (delever, invest, maintain divvy) at once then that's okay too and we'll all make money, but I'm not worried about them doing it all. I'm worried about them trying to hold on to the divvy (and/or aggressive growth plans) and screwing themselves (and us) over.

 

anyways i think i've explained why i hate the dividend.

[ERICOPOLY]

I've been mulling it over today...

 

Like you say, the options market is already pricing in a cut.

 

So I'm more inclined to buy puts -- this way it won't stress me out if the dividend stays intact, in fact it would benefit me and would make it cheaper than going with calls.

 

And although I'd suffer a bit of decay if the dividend gets cut sooner than the options market expects, it would still be a positive event overall in terms of improving the future upside potential.

 

So for my emotional wellbeing and positive spiritual good feelings, I choose the puts+common as it will make me a happier shareholder however management ultimately decides on this issue.

[thepupil]

i thought about doing that, but even with a priced in cut, it still seemed like a pretty disadvantaged way of being long. I mean buying the ATM cost 50% of the stock as you pointed out, which seems to increase risk rather than reduce it and not give you much leverage. Which strike did you buy?

 

EDIT: I think the cumulative 2 yr dividend priced in is around 60 cents, btw, if i remember correctly. versus the run rate 50 cents/year for $1.00.

[ERICOPOLY]

i thought about doing that, but even with a priced in cut, it still seemed like a pretty disadvantaged way of being long. I mean buying the ATM cost 50% of the stock as you pointed out, which seems to increase risk rather than reduce it and not give you much leverage. Which strike did you buy?

 

I haven't bought the options yet.  Still thinking that one out. 

 

 

 

 

[ERICOPOLY]

EDIT: I think the cumulative 2 yr dividend priced in is around 60 cents, btw, if i remember correctly. versus the run rate 50 cents/year for $1.00.

 

I thought about saying that earlier but I hesitated as I don't know what the borrow cost is on the shares.  Even non dividend paying stocks have options that get sometimes strongly out of put/call parity, due to the cost of borrow.

 

So I can't say for sure.

[tyska]

I think the issue is that the dividend costs $220 million per year.  With $90 oil, they generate about $930m in CFO and have $840 m in cap-ex planned.  However with $70 oil, the CFO declines to an estimated $530 m (not enough to cover cap-ex (which includes growth) and current divy).  Based upon there latest plan about $100m cap-ex is maintenance (which I am assuming means declining production from existing fields).  The estimate production growth with the $750 m cap-ex is 8% per year on a BoE basis.  The question in my mind is how much growth is cut back if growth cap-ex is closer to $430 m per year.  They clearly have the ability to slow the growth and maintain the dividend which is what they should do if the prices stay low in any case.

 

Packer

 

My point is the $220 m isn't the cash cost they need as a large percent is or was in DRIP. Another thought is  a lower cap-ex may actually go further as they might be able to squeeze more out of the service companies looking for work.

[thepupil]

I think the issue is that the dividend costs $220 million per year.  With $90 oil, they generate about $930m in CFO and have $840 m in cap-ex planned.  However with $70 oil, the CFO declines to an estimated $530 m (not enough to cover cap-ex (which includes growth) and current divy).  Based upon there latest plan about $100m cap-ex is maintenance (which I am assuming means declining production from existing fields).  The estimate production growth with the $750 m cap-ex is 8% per year on a BoE basis.  The question in my mind is how much growth is cut back if growth cap-ex is closer to $430 m per year.  They clearly have the ability to slow the growth and maintain the dividend which is what they should do if the prices stay low in any case.

 

Packer

 

My point is the $220 m isn't the cash cost they need as a large percent is or was in DRIP. Another thought is  a lower cap-ex may actually go further as they might be able to squeeze more out of the service companies looking for work.

 

 

it will still be a large portion of their pro-forma (for oil price drop) operating cash flow. Even if the cash cost is just $100MM, that's 20% of the Packer-estimated $530MM.

 

Another benefit  of cutting is to drive the last of the income oriented shareholders out of the stock and remove the overhang of the fear of the dividend cut and allow the "i'll buy when they cut the dividend" deep value guys to step in more aggressively; I know I'd be a little bigger if they cut to zero (it'd also give me more faith in management).  I think it would be beneficial for both the medium term stock price to get the cut over and done with AND the long term health of the company.

 

Rip the band-aid off, increase odds of survival. Err on the side of caution/paranoia. Have no vision. Cut growth and hunker down. Be fearful when you should be fearful. don't try to do some dividend maintaining  tightrope walk to keep the yield pigs happy. slaughter them for the better of the company!  ;D

[SharperDingaan]

You might want to ask yourself why they wouldn't cut the div to zero, AND drastically cut back Capex in the face of $70 oil; & then quietly start buying back their stock if the worst doesn't happen - as forecast. And if you're going to cut the div; wouldn't you also try to write off everything that you possibly could, include it in the year-end audit - & blame it the old management?

 

Its got quite a way to go yet.

 

SD

[thepupil]

You might want to ask yourself why they wouldn't cut the div to zero, AND drastically cut back Capex in the face of $70 oil; & then quietly start buying back their stock if the worst doesn't happen - as forecast. And if you're going to cut the div; wouldn't you also try to write off everything that you possibly could, include it in the year-end audit - & blame it the old management?

 

Its got quite a way to go yet.

 

SD

 

Sharper, forgive me, but I don't know what you saying. Can you elaborate? I think it would be great for them to cut to zero and write down a bunch of assets. Are you agreeing? Or are you saying that there is some reason they are not doing so? Or are you saying "patience, pupil, they still need to do those things for the stock to bottom"? Or are you saying "pupil, they are in better shape than you think, they still have a way to go before they do all those things"

[Guest wellmont]

dividend raise? options market already implies a massive cut. If you think they're going to raise and maintain for 2 years, be my guest and buy the put, you'll make a killing.

 

Why is capital return (divvy or buyback) the appropriate action for a levered commodity producer that just saw its commodity drop by 40%?

 

Imagine you were invested in a levered hedge fund..."We have experienced massive mark to market losses and all future additions by existing LP's have been canceled. We've decided that the right thing to do is maintain all our positions and give you back 20% of your remaining capital and get more levered"

 

I'd want to get back 100% of my capital and would think the GP was a nut. When you are too levered and start losing big , you reduce gross: sell longs (oil assets in this instance) and cover shorts (debt in this instance)...you don't want to get a margin call (BK, forced fire sales) and realize losses on the entire portfolio at the bottom.

 

I agree with this analysis. market is saying "phooey" to PWT management, daring it to keep the dividend intact. if he wants the stock to go up he should cut the dividend. show people you're serious about making it through this cycle instead of appealing to widows and orphans in Canada. the company is seen as a distress asset and as long as oil prices stay where they are and the divvie stays where it is, the stock is in trouble imo. this dividend is nothing more than getting your own capital returned to you when the company needs it, if only to prop up perceptions that it's a going concern.

 

btw anybody know the pwt bonds prices at the moment?

[Uccmal]

Right now PWT is being hit by the perfect storm. 

 

We have oil prices tanking just ahead of tax loss selling season.  And what a tax loss it is.  Management seems to be saying that for now things are under control.  If they let the dividend run another quarter to see what unfolds, the give up 40-45 M post DRIP.  Its not going to kill them.  Management has been through multiple cycles.

 

I see announcements coming out all over the place about reductions in Capex at other companies. PWT had already done some of this work during their turnaround which in my mind puts them further ahead.  The culture of waste at PWT has been reined in. 

 

Service companies are the ones who are really going to suffer in the medium term.  The cost side of an E&Ps equation is going to drop in a lagged fashion to the price of oil. 

 

At some point the reduction in production will cause prices to swing.  Oil operates on a tight cycle, unlike mining, or alot of manufacturing, that requires long layoff times, and long ramp up times.

[Uccmal]

This is just like the old days on the BAC thread....

[Guest wellmont]

how many people reinvest their dividend (this is dumb to do btw)?  maybe that's why they are reluctant to cut it?

[plato1976]

As the previous posts mentioned, PWT debt is still at par

so this is the confusing part...

 

dividend raise? options market already implies a massive cut. If you think they're going to raise and maintain for 2 years, be my guest and buy the put, you'll make a killing.

 

Why is capital return (divvy or buyback) the appropriate action for a levered commodity producer that just saw its commodity drop by 40%?

 

Imagine you were invested in a levered hedge fund..."We have experienced massive mark to market losses and all future additions by existing LP's have been canceled. We've decided that the right thing to do is maintain all our positions and give you back 20% of your remaining capital and get more levered"

 

I'd want to get back 100% of my capital and would think the GP was a nut. When you are too levered and start losing big , you reduce gross: sell longs (oil assets in this instance) and cover shorts (debt in this instance)...you don't want to get a margin call (BK, forced fire sales) and realize losses on the entire portfolio at the bottom.

 

I agree with this analysis. market is saying "phooey" to PWT management, daring it to keep the dividend intact. if he wants the stock to go up he should cut the dividend. show people you're serious about making it through this cycle instead of appealing to widows and orphans in Canada. the company is seen as a distress asset and as long as oil prices stay where they are and the divvie stays where it is, the stock is in trouble imo. this dividend is nothing more than getting your own capital returned to you when the company needs it, if only to prop up perceptions that it's a going concern.

 

btw anybody know the pwt bonds prices at the moment?

[thepupil]

As the previous posts mentioned, PWT debt is still at par

so this is the confusing part...

 

dividend raise? options market already implies a massive cut. If you think they're going to raise and maintain for 2 years, be my guest and buy the put, you'll make a killing.

 

Why is capital return (divvy or buyback) the appropriate action for a levered commodity producer that just saw its commodity drop by 40%?

 

Imagine you were invested in a levered hedge fund..."We have experienced massive mark to market losses and all future additions by existing LP's have been canceled. We've decided that the right thing to do is maintain all our positions and give you back 20% of your remaining capital and get more levered"

 

I'd want to get back 100% of my capital and would think the GP was a nut. When you are too levered and start losing big , you reduce gross: sell longs (oil assets in this instance) and cover shorts (debt in this instance)...you don't want to get a margin call (BK, forced fire sales) and realize losses on the entire portfolio at the bottom.

 

I agree with this analysis. market is saying "phooey" to PWT management, daring it to keep the dividend intact. if he wants the stock to go up he should cut the dividend. show people you're serious about making it through this cycle instead of appealing to widows and orphans in Canada. the company is seen as a distress asset and as long as oil prices stay where they are and the divvie stays where it is, the stock is in trouble imo. this dividend is nothing more than getting your own capital returned to you when the company needs it, if only to prop up perceptions that it's a going concern.

 

btw anybody know the pwt bonds prices at the moment?

 

bloomberg isn't always correct. that is my only source. someone who has connections to canadian sell side (or wherever those are traded) will have to get the real prices of the debt, which may not be what is on bloomberg

[tyska]

dividend raise? options market already implies a massive cut. If you think they're going to raise and maintain for 2 years, be my guest and buy the put, you'll make a killing.

 

Why is capital return (divvy or buyback) the appropriate action for a levered commodity producer that just saw its commodity drop by 40%?

 

Imagine you were invested in a levered hedge fund..."We have experienced massive mark to market losses and all future additions by existing LP's have been canceled. We've decided that the right thing to do is maintain all our positions and give you back 20% of your remaining capital and get more levered"

 

I'd want to get back 100% of my capital and would think the GP was a nut. When you are too levered and start losing big , you reduce gross: sell longs (oil assets in this instance) and cover shorts (debt in this instance)...you don't want to get a margin call (BK, forced fire sales) and realize losses on the entire portfolio at the bottom.

 

I agree with this analysis. market is saying "phooey" to PWT management, daring it to keep the dividend intact. if he wants the stock to go up he should cut the dividend. show people you're serious about making it through this cycle instead of appealing to widows and orphans in Canada. the company is seen as a distress asset and as long as oil prices stay where they are and the divvie stays where it is, the stock is in trouble imo. this dividend is nothing more than getting your own capital returned to you when the company needs it, if only to prop up perceptions that it's a going concern.

 

btw anybody know the pwt bonds prices at the moment?

 

You know I have heard that" cut the div. and the stock will rise", or the more common " a div cut is already priced into it". But in my experience I can not think of one stock that has cut the div and didn't tank even more. Some have come back, but over a long time frame.

[Guest wellmont]

dividend raise? options market already implies a massive cut. If you think they're going to raise and maintain for 2 years, be my guest and buy the put, you'll make a killing.

 

Why is capital return (divvy or buyback) the appropriate action for a levered commodity producer that just saw its commodity drop by 40%?

 

Imagine you were invested in a levered hedge fund..."We have experienced massive mark to market losses and all future additions by existing LP's have been canceled. We've decided that the right thing to do is maintain all our positions and give you back 20% of your remaining capital and get more levered"

 

I'd want to get back 100% of my capital and would think the GP was a nut. When you are too levered and start losing big , you reduce gross: sell longs (oil assets in this instance) and cover shorts (debt in this instance)...you don't want to get a margin call (BK, forced fire sales) and realize losses on the entire portfolio at the bottom.

 

I agree with this analysis. market is saying "phooey" to PWT management, daring it to keep the dividend intact. if he wants the stock to go up he should cut the dividend. show people you're serious about making it through this cycle instead of appealing to widows and orphans in Canada. the company is seen as a distress asset and as long as oil prices stay where they are and the divvie stays where it is, the stock is in trouble imo. this dividend is nothing more than getting your own capital returned to you when the company needs it, if only to prop up perceptions that it's a going concern.

 

btw anybody know the pwt bonds prices at the moment?

 

You know I have heard that" cut the div. and the stock will rise", or the more common " a div cut is already priced into it". But in my experience I can not think of one stock that has cut the div and didn't tank even more. Some have come back, but over a long time frame.

 

how is "maintaining it" working for pwt?

[yadayada]

why not buy the 2$ 2017 puts for 60 cents?

 

Also isn't part of this hedge, if oil goes up by end of 2015, dividend will return. And so upside for the stock pays off for the put option as well.

 

The only way this can go bad is if they cut dividend quickly, and oil stays low for the next 2 years.