PENN WEST PETROLEUM LTD. (TSX – PWT; NYSE – PWE) (“Penn West“, “we“, “us” or “our“) announces it has taken the following further actions in response to the current commodity price environment:
- we will limit our capital expenditures to funds flow from operations by year-end 2015
- we will suspend our dividend and reduce board compensation
- we will significantly reduce our cost structure through a 35% workforce reduction
“We continue to take concrete steps to strengthen our balance sheet,” said Dave Roberts, President and CEO of Penn West, “Limiting our capital programs to the funds flow generated from our assets and suspending our dividend are necessary steps. Building on a combination of process and efficiency improvements over the past 12 to 18 months, we are taking further actions today to significantly reduce our cost structure without impacting our ability to execute. We remain flexible and well positioned to move forward when oil prices improve.”
Limit Capital Expenditures to Funds Flow from Operations
Going forward, our total capital expenditures will remain within our funds flow from operations. Over the last month, we have identified $75 million of planned 2015 capital activity that will be deferred, which is incremental to the $50 million capital spending reduction announced as part of our second quarter results. This $500 million revised capital budget represents a 40% reduction from the original November 2014 guidance of $840 million. We will continue to look for additional opportunities to further reduce our 2015 capital expenditures.
We have a significant inventory of wells already drilled and awaiting either completion or tie-in where there is a strong economic case for completing the work. While we finish these wells, we anticipate being above our target activity levels which we will reach near the end of the year. In finalizing plans for our 2016 capital program, we will limit our capital expenditures to estimated funds flow from operations on a full year basis.
We will focus our development capital on our core Viking and Cardium light oil properties in 2016. These light oil plays continue to offer attractive rates of return with short payback periods even at current commodity price levels and existing cost structures. Development will be directed towards primary exploitation in order to reduce payback periods.
| Area | Select First Half 2015 Metrics | |||
| Production | Liquids Weighting | Operating Cost | Netback | |
| Cardium Greater Viking Slave Point(1) |
29,500 boe/d 18,500 boe/d 6,000 boe/d |
66% 87% 97% |
$14.50/boe $16.00/boe $20.00/boe |
$21.50/boe $23.50/boe $25.00/boe |
| Total Core | 54,000 boe/d | 76% | $15.50/boe | $22.50/boe |
| (1) | We anticipate limited investment at Slave Point at current commodity price levels. |
Suspension of Dividend
Our Board of Directors has decided to suspend our dividend until further notice following the payment on October 15, 2015 of the most recently declared dividend. We estimate this action will reduce annual cash outlays by approximately $20 million. The $0.01 per share dividend declared by our Board of Directors on July 30, 2015 will still be paid on October 15, 2015 to shareholders of record at the close of business on September 30, 2015.
In addition, effective today, our Board of Directors has voluntarily decreased the annual retainers payable to non-management directors. In particular, the annual retainer payable to the Board Chair will be reduced by 50%, while the annual retainers payable to the remaining non-management directors will be reduced by 40%.
“The Board of Directors is committed to ensuring the long-term sustainability of Penn West,” commented Rick George, Board Chair of Penn West, “We view the suspension of the dividend and the reduction of board compensation as important steps toward achieving that goal.”
Reduction of Current Cost Structure
We will reduce our total workforce by 35%, representing over 400 full time employees and contractors, with most of this reduction being effective immediately. The remainder of this workforce reduction is expected to be completed by the end of the year. Most of the employees and contractors leaving are located in our head office in Calgary. The total cost savings associated with this workforce reduction are expected to be approximately $45 million per year.
“We have made a number of exceptionally difficult decisions in order to remain competitive in the current commodity price environment,” Dave Roberts commented, “We view the cost reductions as sustainable and we will remain well positioned for the potential expansion of development activities and capital programs in the future.”
Continued Covenant Compliance
We continue to be in compliance with all of the financial covenants in our syndicated bank facility and senior notes. At June 30, 2015, Senior Debt to EBITDA was 3.2 times, relative to the 5.0 times limit that we negotiated with our lenders, and which will remain in effect until the end of Q2 2016. The covenant limit will decrease to 4.5 times for Q3 2016, to 4.0 times for Q4 2016 and to 3.0 times starting in Q1 2017. We currently have approximately $750 million of undrawn capacity under our $1.2 billion syndicated bank facility. Unlike many of our industry peers, availability under our syndicated bank facility is not based on a borrowing base calculation and therefore is not subject to redeterminations prior to its scheduled maturity in May 2019.
We remain committed to identifying alternatives to increase our financial flexibility and maintaining our ongoing compliance with all of our financial covenants. We view the monetization of our existing foreign exchange hedges as one such alternative. Currently, these hedge contracts hold a positive mark to market value of approximately $75 million. We plan to monetize these hedges as required in the second half of the year.
As a result of the reduction in our workforce, we anticipate recording a one-time charge related to severance costs during the third quarter. We expect that these costs will be excluded from our funds flow from operations and EBITDA metrics.
Initiatives Already in Progress
Additional Non-Core Asset Sales to Reduce Debt
Over the past two years, we have divested an estimated 30,000 boe/d of non-core assets for proceeds of approximately $1.5 billion. This has allowed us to reduce debt by over one third, which is a significant achievement in this market.
We are committed to pursuing additional non-core asset sales in an effort to further reduce debt and strengthen our balance sheet. These assets offer attractive upside to strategic buyers who are better positioned to maximize their potential through additional capitalization. While the current commodity price environment poses challenges, we will continue to take a disciplined approach to our process and we remain confident in our ability to complete additional transactions to further advance our goal of debt reduction.
As we are successful in divesting of our non-core assets, we expect to realize an additional 15% to 30% reduction in our overhead costs.
| Area | H1 Production | Liquids Weighting |
| Swan Hills NE BC & NW AB East Central AB Mitsue PROP Weyburn Other |
8,000 boe/d 8,000 boe/d 7,000 boe/d 4,500 boe/d 3,000 boe/d 2,500 boe/d 1,000 boe/d |
76% 8% 41% 78% 97% 100% 55% |
| Total Non-Core (1) | 34,000 boe/d | 56% |
| (1) | Note that the 2014 aggregate year end reserve values for the non-core properties above are based on Sproule Associates Limited forecast price deck as at December 31, 2014 were $1.2 billion Proved Developed Producing and $2.1 billion Proved Plus Probable. |
Further Cost Reductions
Over the last 18 to 24 months, we have reduced our absolute operating costs by over 20% at our existing properties excluding the impact of divestitures. Furthermore, our well costs in both the Viking and Cardium are down 20% to 30% relative to mid 2014.
We will continue to focus on operating our business in a more efficient manner, allowing us to be more competitive and performance driven. We will do things more efficiently and at lower cost, while maintaining our focus on safe and responsible operating practices. In particular, over the next 12 to 18 months, we anticipate:
- up to a further 10% reduction in our individual well drilling, completion, equip and tie-in costs as well as associated facilities relative to where we are at today, in addition to efficiencies realized since mid 2014
- up to a further 10% reduction in our total operating expenses relative to current run rates, incremental to savings realized in the last 18 to 24 months
Farmouts
As part of our efforts to control spending and reduce drilling risk while maximizing the value of our large land base, we will continue to actively pursue farm-out opportunities. Over the last year we have been successful in securing approximately 91 gross well commitments, of which 39 have been spud to date. Through these farm-out agreements, we expect to receive income from these wells through either a royalty interest or working interest structure without having to fund any of the capital outlays.
Commodity Hedging Program
Our existing hedging program is expected to help reduce the volatility of our funds flow from operations, and thereby improve our ability to align capital programs. We target having hedges in place for approximately 25% to 40% of our crude oil exposure, net of royalties, and 40% to 50% of our gas exposure, net of royalties. We will seek to layer on these positions over a longer period of time in a systematic fashion, subject to market conditions. We have already reached the lower end of our crude oil and natural gas target levels for the remainder of 2015. Our existing positions are as follows:
| Q3 2015 | Q4 2015 | Q1 2016 | Q2 2016 | Q3 2016 | Q4 2016 | |
| Volume (bbl/d) Price (C$/bbl)(1) Volume (mmcf/d) Price (C$/mcf) |
12,500 $70.40 70 $2.86 |
12,500 $72.57 70 $2.86 |
9,500 $72.83 19 $3.08 |
6,000 $71.94 19 $3.08 |
5,000 $72.08 19 $3.08 |
5,000 $72.08 19 $3.08 |
| (1) | 5,000 bbl/d of $US contacts in Q3 2015 illustratively converted to C$ at a rate of C$1.30/US$ |
Updated 2015 Guidance
We have updated our guidance given the impact of the $414 million in asset dispositions to date and the further planned reductions in our capital programs. Our revised 2015 capital budget is $500 million, representing capital expenditures of approximately $245 million in the second half of 2015. Our revised 2015 production guidance range is 86,000 – 90,000 boe/d. Although we continue to view funds flow from operations to be an important metric, we will shift our focus to providing guidance on our controllable costs given the continuing volatility in commodity prices. Consequently, we expect our operating costs for the year to be between $19.25/boe and $19.75/boe, while our G&A is expected to be between $2.80/boe and $3.05/boe.
Conference Call Details
A conference call and webcast presentation will be held to discuss the matters noted above at 8:00 a.m. Mountain Time (10:00 a.m. Eastern Time) on September, 1, 2015.
To listen to the conference call, please call 647-427-7450 or 1-888-231-8191 (toll-free). This call will be broadcast live on the Internet and may be accessed directly at the following URL:
http://event.on24.com/r.htm?e=1041938&s=1&k=5E7BA917461D1AE08490F654B2574B04
A digital recording will be available for replay two hours after the call’s completion, and will remain available until September 15, 2015 21:59 Mountain Time (23:59 Eastern Time). To listen to the replay, please dial 416-849-0833 or 1-855-859-2056 (toll-free) and enter Conference ID 26816650, followed by the pound (#) key.
About Penn West
Penn West is one of the largest conventional oil and natural gas producers in Canada. Our goal is to be the company that redefines oil & gas excellence in western Canada. Based in Calgary, Alberta, Penn West operates a significant portfolio of opportunities with a dominant position in light oil in Canada on a land base encompassing approximately 4.3 million acres.
Penn West shares are listed on the Toronto Stock Exchange under the symbol PWT and on the New York Stock Exchange under the symbol PWE. All dollar amounts herein are in Canadian dollars.
Non-GAAP Measures
This news release includes non-GAAP measures not defined under International Financial Reporting Standards (“IFRS“) including funds flow, funds flow from operations and netback. Non-GAAP measures do not have any standardized meaning prescribed by GAAP and therefore may not be comparable to similar measures presented by other issuers. Funds flow is cash flow from operating activities before changes in non-cash working capital and decommissioning expenditures. Funds flow and funds flow from operations are used to assess the Penn West’s ability to fund dividend and planned capital programs. Funds flow from operations excludes the effects of financing related transactions from foreign exchange contracts and debt repayments/ pre-payments and is more representative of cash related to continuing operations. See “Calculation of Funds Flow/Funds Flow From Operations” below for a reconciliation of funds flow to its nearest measure prescribed by IFRS. Netback is the per unit of production amount of revenue less royalties, operating expenses, transportation and realized risk management gains and losses, and is used in capital allocation decisions and to economically rank projects.
| Calculation of Funds Flow/Funds Flow From Operations | |||||||||
| (millions, except per share amounts) | Three months ended June 30 |
Six months ended June 30 |
|||||||
| 2015 | 2014 | 2015 | 2014 | ||||||
| Cash flow from operating activities | $ | (67) | $ | 214 | $ | 89 | $ | 436 | |
| Change in non-cash working capital | 109 | 77 | 54 | 111 | |||||
| Decommissioning expenditures | 5 | 7 | 16 | 20 | |||||
| Funds flow | 47 | 298 | 159 | 567 | |||||
| Monetization of foreign exchange contracts | (19) | – | (63) | – | |||||
| Settlements of normal course foreign exchange contracts | (23) | (2) | (25) | (2) | |||||
| Realized foreign exchange loss – debt prepayments | 44 | – | 44 | – | |||||
| Realized foreign exchange loss – debt maturities | 30 | 3 | 36 | 3 | |||||
| Funds flow from Operations | $ | 79 | $ | 299 | $ | 151 | $ | 568 | |
Oil and Gas Information Advisory
Barrels of oil equivalent (“boe”) may be misleading, particularly if used in isolation. A boe conversion ratio of six thousand cubic feet of natural gas to one barrel of crude oil is based on an energy equivalency conversion method primarily applicable at the burner tip and does not represent a value equivalency at the wellhead. Given that the value ratio based on the current price of crude oil as compared to natural gas is significantly different from the energy equivalency conversion ratio of 6:1, utilizing a conversion on a 6:1 basis is misleading as an indication of value.
