Penn West Petroleum (NYSE: PWE)
The Labor Department reported 287,000 new jobs created in June. To U.S. Secretary of Labor Thomas E. Perez, this means the economy is resilient and strong. To Wall Street, it meant a stocks rally on Friday. For Canadian oil and natural gas producer Penn West Petroleum (NYSE: PWE) though, the oil price downturn challenge remains with crude trading at $45 a barrel. Like other similar companies hit by the protracted oil price downturn, Penn West is struggling and threatened by a debt default and even a delisting from the New York Stock Exchange for not maintaining the required $1 minimum closing price for its common stocks. But the Calgary-based company has other things in mind than throwing in the towel.
Penn West is determined to stay afloat until improved oil price appears over the horizon. It complied in June with the NYSE standard for continued listing and staved off a debt default last month by selling $1.3 billion in non-core assets and renegotiating lending agreements with creditors.
Penn West shares should have a minimum average closing price of $1 for 30 consecutive trading days in the NYSE board. Its shares traded at $1.42 on July 8.
Financial Survival Strategy
A debt of $1.8 billion at the end of the first quarter sent Penn West shares falling by as much as 25 percent in May. Penn West’s answer was selling oil properties in Saskatchewan for $975 million. The sell-off cut debts to approximately $600 million from $2.1 billion last year. The transaction also cut the company’s interest expenses by nearly $100 million annually and offset the loss in net operating income from the Saskatchewan properties, which has a production of 13,650 barrels of oil equivalent per day (boe/d).
Penn West also sold assets in Alberta for another $140 million. The site produces 3,100 boe/d.
Proceeds from the sales of the two properties will be used to fund Penn West’s more competitive Cardium and Alberta Viking areas, according to president and CEO David Roberts. The funding is projected to increase the company’s annual production by 10 percent in the next 10 years.
For the Cardium area, there are 1,500 locations to be drilled over a 20-year period. Its first quarter production was approximately 19,500 boe/d. Operating cost is at $10/boe with netbacks of $17/boe.
Meanwhile, first quarter production in the Alberta Viking area was approximately 1,000 boe/d. Its 500 potential drilling locations will be the focus of development next year.
Penn West has a third property being co-developed with a joint venture partner: the Peace River area. First quarter net production was approximately 5,000 boe/d with operating costs of $1/boe. The company plans to shell out $5 million to $10 million in the second half to develop the Peace River area.
Penn West will continue to divest other high-cost but non-earning properties by year-end to generate $100 million to $200 million.
Roberts calls Penn West’s survival strategy as “perseverance.” His efforts already cut debts by $2.8 billion over the last three years. With perseverance, he is determined to end the company’s most challenging time in history and open a new chapter of sustainable growth marked by operating costs of $10-$12/boe.