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Tough measures in tough times Penn West tries for fresh start by unloading prized assets in Saskatchewan; more deals expected after year-long downward spiral GARY PARK For Petroleum News
Penn West Petroleum, once a star among Canada’s mid-size petroleum producers, has ended a decade of frequent turmoil by returning itself to the start line.
It has jettisoned one of its two main assets by selling all of its Saskatchewan holdings in the Viking light oil play for C$975 million to Teine Energy, a privately held producer owned 77 percent by the investment board of the Canada Pension Plan, as well as C$140 million of Alberta assets to unidentified buyers.
For Teine the purchase comes with production of 16,300 barrels of oil equivalent per day (91 percent liquids), proved plus probable reserves of 53.2 million boe (also 91 percent liquids) and 410,000 net acres of undeveloped land.
Penn West also said it expects to sell additional assets pumping 20,000 barrels per day later this year, dramatically shrinking its focus to the Pembina Cardium region of Alberta.
Jeremy McCrea, an analyst at Raymond James, said the Viking transaction was a drastic, but necessary move, allowing Penn West to reduce its debt-to-cash-flow ratio to 3.9 times in 2017 from 13 times at the end of 2015, or to a net C$600 million from C$2.1 billion at the end of 2015.
To those who view the debt ratio as relatively high, he said that fails to capture the company’s relatively low decline profile of 19 percent, while a revised capital spending program should allow the company to grow much easier and further lower the debt-to-cash-flow figure in 2018, he said.
“The sale is a definitive step which will help change the narrative from constant discussions around its debt towards a constructive conversation around (the company’s) recent performance,” McCrea said in a note to clients.
He said that “meaningful solutions cannot be achieved through half measures. In the case of Penn West, the full measure solution of its debt overhand was the sale of one of its jewels.”
The deal allowed McCrea to revise his rating for Penn West to “outperform” from “underperform” and lift his 12-month target price to C$3 a share from 75 cents.
Forced transaction? Barclays said it believed the transaction was forced by debt-holders - speculation that has deeply annoyed the current executive team - at a time the company was approaching a breach of its covenants.
The bank said the company will now be able to remain on side with its debt terms through the second half of 2016, although Barclays analyst Grant Hofer increased his target to a more modest C$1.50 from C$1.
He said the market will now shift its focus from debt to the operation of remaining assets “and on this front the market is likely to take a wait-and-see approach.”
It is not yet clear how those beyond bondholders and remaining employees will response to Penn West’s attempt to wipe its slate clean and restart from scratch.
Chief Executive Officer David Roberts said in a memo to staff that “we come out of the shadows of the past and are facing a bright future.”
Whether that will help soften the blow from the loss of billions of dollars in market capitalization may need more explanation, especially among those investors who have seen their share prices plunge from a peak of C$47 in 2006.
Severe beating in market Regardless of the fact that Canadian government moves to scuttle income trusts, combined with a recession and two slumps in oil prices, Penn West shareholders have taken one of the most severe beatings on the Toronto Stock Exchange’s oil and gas group which has fallen by an average 50 percent over the same period.
Chief Financial Officer David Dyck candidly admits that the Teine transaction is “pivotal ... while we have made significant progress over the past three years in reducing out total debt, this asset sale results in a markedly improved capital structure and positions the company in the top tier of our peers in terms of all significant debt metrics.”
There are many observers who insist Penn West was out of control under its former management.
When forced to abandon the tax benefits of operating as a trust that gave it the freedom to load up on property acquisitions in Saskatchewan and Alberta to fuel its cash distributions, Penn West was unprepared to make the transition to a dividend-paying corporation, given the high capital costs and rising liabilities associated with its aging properties.
Its answer to declining production was a C$3.8 billion acquisition in 2007 of Canetic Resources Trust that drastically inflated debt.
Accounting scandal Even when Rick George, the former chairman at Suncor Energy, took over the helm at Penn West, the hopes of a turnaround were blown off course by an accounting scandal that forced the company to restate years of financial results.
That was compounded by the recent disclosure that one of China’s state-owned energy companies had bid C$6.8 billion - or about C$13-C$14 a share - in 2013 to acquire Penn West just after the new management was installed.
What has angered many investors is the realization that peer companies, notably ARC Resources and Peyto Exploration & Production, have managed to ride out the industry storms and retain much of their value.
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