It was only a year ago, when beaten-down intermediate oil producer Penn West Petroleum Ltd. (TSX:PWT)(NYSE:PWE) appeared to be on the brink of failure.
Since then the company has not only completed a transformative asset divestment that virtually guaranteed its survival, but it has focused on developing its remaining assets and rebuilding production. A recent string of positive information has sparked conjecture that Penn West is on the cusp of unlocking considerable value for investors.
Now what?
While the June 2016 $975 million sale of Penn West’s Saskatchewan light oil assets may have guaranteed its survival, this (along with other asset sales) left the company a shell of what it once was. Oil reserves plummeted to 136 million barrels, or less than half of what they were in 2015, whereas production from core assets dropped to be a mere quarter of what it was back in mid-2015.
The good news is that Penn West continues to enjoy significant success with its exploration and development program.
There are signs that its Alberta Viking acreage will deliver value with the wells drilled in 2016 performing significantly ahead of expectations. This asset is believed to hold the same potential as the Saskatchewan Viking acreage sold by Penn West in 2016. Penn West expects to drill 11 more wells over the course of 2017 in this acreage.
Then there is its Cardium acreage which is estimated to have up to three billion barrels of oil in place. While there is no guarantee that all of this crude is commercially recoverable, it highlights the size of the prize. Cardium is a proven formation that has shown itself to be one of the most economic to operate, and this bodes well for Penn West’s continued success.
As its production grows, so too will Penn West’s cash flows, allowing it to fund the development of its Viking asset.
Impressively, Penn West has not only reduced its debt to a very manageable $480 million, which will continue to fall as other assets are sold, but it expects to fund its 2017 drilling program from 80% of its free cash flow for the year.
Penn West has, in fact, been able to reduce drilling costs across the majority of its acreage to be roughly a quarter of what they were three years ago. This means that it can fund its 2017 drilling program and remain free cash flow positive with crude at just over US$50 per barrel.
That is an impressive feat for a company that was on the brink of bankruptcy not so long ago.
So what?
But the big question is, What does all of this mean for investors?
The recent rally in crude, which now sees the North American benchmark West Texas Intermediate trading at about US$54 per barrel, is a very positive development for Penn West. Now that Penn West has a solid balance sheet and has redefined itself as a smaller, tighter, cost-effective operator, it offers considerable value for investors should oil prices continue to rise.
