The carnage in the energy patch has claimed another dividend with beleaguered intermediate oil producer Penn West Petroleum Ltd. (TSX: PWT)(NYSE: PWE) slashing its dividend by 79% on Wednesday. In the past I have been particularly harsh on the outlook for Penn West, having formed this view on the basis of the accounting scandal, declining production, weak operational profitability, and its mountain of debt.
But Penn West has now swallowed the bitter pill, taking three key measures to sustain cash flow and profitability while preserving capital in the current difficult operating environment.
First, it slashed its dividend by a massive 79%, reducing it from $0.14 quarterly to $0.03 quarterly. This creates annual cash savings of around $218 million, which can be better utilised for production sustaining capital expenditure and/or to pay down Penn West’s mountain of debt.
Second, it took the knife to capital expenditures or capex, with its 2015 capital budget reduced by $195 million or 24% compared to 2014. This has created further considerable cost savings, while having little material impact on Penn West’s 2015 production estimates. Despite such a significant reduction in capex, 2015 oil production is forecast to be 90,000 barrels daily or a mere 5% lower than 2014.
Third, the company suspended its dividend reinvestment program. This is an important move because with its shares bouncing around new 52-week lows, it doesn’t want to give its stock away at bargain basement prices, increasing its float and diluting existing shareholders.
I have argued for some time that each of these measures are necessary and long overdue for a company needing to stabilize its balance sheet and preserve capital in an operating environment that is threatening its very survivability.
But is Penn West worth buying?
Clearly, the current difficult operating environment will have a considerable impact on Penn West, particularly its cash flow and profitability.
Already it has had to reforecast its 2015 outlook using a West Texas Intermediate price of $65 per barrel — 25% lower than the original outlook from November. The difficult operating environment will also make it exceptionally hard for Penn West to continue its asset divestment program. It had hoped to complete up to a further $1 billion of asset sales in 2015.
But while I believe Penn West should have eliminated its dividend altogether, the cut, combined with reduced capex and the ensuing savings, is certainly a move in the right direction and leaves Penn West well positioned to weather the crude price crunch.
Penn West has also reduced its debt by $1.2 billion over the course of 2014, and long-term debt is now a manageable 1.8 times cash flow. It also remains highly liquid with a completely undrawn $1.7 billion credit facility, while there is also sufficient fat in the company’s debt covenants to absorb significantly lower crude prices.
Finally, with its share price having being pummeled in recent weeks because of plunging crude prices it is now trading with some appealing valuation multiples, including an enterprise-value of eight times its oil reserves and four times EBTDA.
While I have been a harsh critic of Penn West for some time, these recent moves make it an interesting speculative play on a rebound in oil prices.
