Penn West Petroleum Ltd. (TSX:PWT)(NYSE:PWE) has a really big problem. It has until the end of June to reach an agreement with its lenders to amend its financial covenants or else it could be in default of those covenants due to its large debt load and weak oil prices.
While the company is actively engaged in discussions with its lenders, it is running out of time to reach an agreement. That puts the company in a very precarious financial position, increasing the likelihood that it might not survive the downturn.
The looming deadline
As of the end of the first quarter, Penn West remained in compliance with all of its debt covenants.
In fact, its senior-debt-to-EBITDA ratio stood at 4.4 times, which was below its five times limit. That said, the company gave a warning in its first-quarter earnings release: “If the current low commodity price environment continues, we anticipate that we will not be able to certify, following the end of the second quarter, compliance with the senior debt to EBITDA or total debt to EBITDA financial covenants at June 30, 2016.”
Because of those concerns, the company was in active discussions with its lenders to amend these financial covenants before the end of the quarter, which would mitigate the risk of default. However, it has yet to announce an amended agreement, leaving it with no more than a month to address the issue.
That’s a concern because the company warned that there was “no guarantee” that it would be successful in negotiating amended financial covenants with its lenders. There’s a real risk its lenders won’t be lenient, especially considering that lenders just agreed to amend the covenants last year.
Exploring all other options
Because there is a real risk that its lenders won’t agree to another covenant amendment, Penn West is pursuing additional actions to reduce its debt. The company noted that it is pursuing both additional asset sales as well as outside capital from strategic investors.
During the first quarter the company was able to continue to make progress on asset sales. It sold its Slave Point assets for $148 million and other non-core assets for $80 million. That brought its asset sale total up to $1 billion since the beginning of last year. The company estimates that it has another 23,500 barrels of oil equivalent per day in non-core assets that could be sold, or roughly a third of its current output.
However, in addition to asset sales, it is seeking a potential cash infusion from outside investors to prop up its balance sheet. This could include finding a joint venture partner to fund the development of its core Viking or Carium assets as well as bringing on a financial investor to provide it with a cash infusion.
Either option is challenging in the current environment. The company’s most recent asset sales have fetched much weaker valuations than last year’s sales. Meanwhile, strategic investors are looking for “once in a lifetime” deals, with many waiting to pick up assets at fire-sale prices due to bankruptcies rather than taking on the added risk of investing in a financially struggling producer.
Investor takeaway
Penn West Petroleum is really running out of time to address its financial situation. As such, there is a real risk that the company won’t be able to address the situation in time. Because of this risk investors will want to steer clear of this oil stock, especially as the odds are increasing that it might not survive the downturn even though oil prices are starting to rise.
