Penn West Petroleum: a Smart Investment

Penn West Petroleum (PWE) announced first quarter ended March 31, 2016 gross revenue of $231 million, down 9.4 percent year-over-year from $340 million during the same period last year.

Penn West declared first quarter of 2016 net loss of $100 million or $0.20 of diluted loss per share as against a net loss of $248 million or $0.49 of diluted loss per share in first quarter of 2015.

The upstream energy production company reported continued year-over-year decline in its top line primarily driven by the ongoing weaker global commodity demand and pricing environment coupled with the rising exploration expenditures, eating into the company’s key margins.

Smart moves

Penn West has uniquely concluded the earlier declared sales of each of its Saskatchewan assets for a consolidated cash of about $975 million.
In addition, the disposition of extra Alberta assets together with the recently concluded Saskatchewan assets sales is estimated to generate total proceeds of nearly $140 million which is believed to close during the second quarter of 2016. The net cash generated from the strategic assets disposition till date for 2016 is about $1.3 billion, lowering the company’s pro forma total debt to nearly $600 million as of now from approximately $2.1 billion by the concluding fiscal year 2015.

The well-planned assets disposition is believed to notably lower the company’s leverage at existing prices and allow it to optimize its core operations to deliver sustainable long-term profitability amid weaker global commodity demand and pricing environment.

During phase 1 of asset sales, Penn West traded $1.3 billion of non-core assets since the start of 2016 at a superior price. It lowered pro forma total debt to about $600 million, from approximately $3.4 billion during second quarter of 2013 and thus, establishing continued and extremely competitive futuristic leverage options. During phase 2 of strategic high-grade assets disposition, Penn West targets on streamlining the strategic Alberta operations to three key focus areas while delivering pro-forma costs from operations in the range of $10 to $12 per boe which is in line with major operators.

Further, Penn West has an attractive long-term growth profile from organic operations of 10% yearly at existing commodity prices. Moreover, Penn West does have the capability to deliver excess cash flow from operations and greater than the capital expenditures at existing commodity prices. The strategic asset sales are expected to efficiently remove the debt-burden from Penn while ensuring compliance with each financial covenants during 2016.

The well-planned assets disposition strategy over the longer term is believed to generate consistent cash flows for the company while allowing it to profitably run its other major operations and soon deliver enough profitability to start offering attractive shareholder returns and emerge strongly from the continuing global economic meltdown.

The successful conclusion of phase 1 of strategic assets sales has largely fixed the company’s rising debt problem and made it significantly competitive with key peers. Going forward, the phase 2 of asset sales is estimated to get completed by the end of fiscal year 2016 and lead to upgrading of existing expenditures and netbacks. Also, Penn is expected deliver nearly 20,000 boe/d of total production by the year-end 2016 and is forecasted to achieve a CAGR of nearly 10% at existing prices. Moving ahead, Penn has significant potential to deliver exit production growth at a CAGR of about 15% at US $60/bbl WTI while significantly lowering leverage at existing prices which adds to the company’s operating cash flows.

Conclusion

Overall, the investors are advised to “Sell” any equity held in Penn West Petroleum Ltd. considering the company’s poor near-term and longer term growth prospects with PEG ratio of -0.33, indicating no growth but decline. Moreover, Penn is hugely debt-burdened with significant total debt of $1.42 billion against a weaker total cash position of $40.55 million only, restricting the company to continue with its daily operations profitably. The profit margin of -257.79% seems disappointing and indicates no profit but loss.
Published on Jul 15, 2016
By Yaggyaseni Mittra

Copyrighted 2016. Content published with author's permission.

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