Buy Penn West Petroleum for Gains

Penn West Petroleum (PWE) continues to pursue additional asset disposition as a means to further lower its net debt in 2016. This move is a welcome sign for the investors as it will enable the company to improve its financial position. In my view, the company certainly has an option to use these proceeds from the non-core asset sales, as a debt pre-payment to its lenders and can secure its financial covenant. In fact, the company seems to be practicing this as the management said, “We are engaged in discussions with our lenders with a view to entering into agreements to amend these financial covenants prior to the end of the second quarter of 2016.”

Limiting capital expenditure within its fund flow

Penn West, during this not so impressive oil and gas price environment, is focusing on reducing capital and operating costs, as discussed above.

As a result of this move, the company was able to see an improvement in the fund flow. For instance, its fund flow for the quarter came in at $47 million, which is up about $8 million on a sequential basis. A key reason behind this improvement in the fund flow was the cutback in the capital expenditure, which was limited to $18 million for the quarter, compared with $129 million last year.

Going forward, Penn West is expected to spend approximately $50 million in the capital expenditure with an additional $20 million on decommissioning expenditures. This capital expenditure represents a drop of 85% as compared to capital expenditure of $460 million in 2015. Thus, with these efforts of reduction in the operating and capital costs, the company should see an improvement in the fund flow for the year.

Smart moves

Although shares of Penn West have dropped nearly 18% since year-to-date on the back of the rising concerns of defaulting on the financial covenants, this decline in the share price creates an opportunity to buy more of the shares due to the reasons stated above. Moreover, the company is focusing on its core assets such as the Cardium and the Viking that carry netback of $9.50/boe and $14.00/boe at the current price. Thus, Penn West in my view will survive this downturn and provides an option to put your money in the stock for a long-term.

Looking ahead, Penn West Petroleum expects its operating expenses to go down further by nearly 20% on an absolute basis. The company is able to realize this level of reduction in the operating costs due to its new completions and design techniques such as the usage of 12 ton 12 stage completion techniques and a one mile well bore design. As a result of these new techniques, Penn West expects the drilling and completion costs to fall significantly while the development expenses to drop by an impressive 30% on the application of the one mile lateral design in 2016.

Moreover, the company has lowered its operating costs guidance for the year. Penn West now expects its operating costs for the year to range between $$17.00 and $18.00 per Boe, down from its earlier guidance of $18.00 to $18.75 per Boe.


Apart from these operating costs savings, the company is on track to lower its annual G&A expenses to the tune of $15 to $20 million this year as compared to last year. These savings are expected to result from its efforts of resourcefully realigning the staffing levels to best match its expected activity level in 2016.  On account of this realignment, Penn West expects its G&A costs to come in the range of $2.50 per Boe to $2.90 per Boe for the year.

Published on Jun 9, 2016
By Yaggyaseni Mittra

Copyrighted 2016. Content published with author's permission.

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