With time ticking away, Penn West Petroleum Ltd. (TSX:PWT)(NYSE:PWE) pulled off one of the most improbable comebacks in recent memory. Facing an end-of-June deadline, the company was able to secure an impressively attractive valuation for an asset sale, which will eliminate its financial concerns.
In doing so, Penn West can finally close the book on phase one of its transformation plan and start to focus on rebuilding the company upon its new core.
The next steps
While Penn West has nearly completed its plan to fix its balance sheet, the company still has a few more asset sales to complete. Those sales, however, are all part of the next phase of its plan, which is to high-grade its asset base. Its plan is to complete these sales by the end of this year, which is expected to bring in another $100-200 million in cash. That cash will give the company the capital it needs to restart its growth engine.
That growth engine will start from a much smaller base going forward. In fact, once it is finished high-grading its portfolio, Penn West’s production is expected to be a mere 25,500 barrels of oil equivalent per day (BOE/d). That is substantially below last quarter’s rate of 77,010 BOE/d. Further, that production is expected to come from just three assets: Cardium, Peace River, and Alberta Viking.
By shrinking its core, Penn West expects to be able to drive strong double-digit production growth going forward. It estimates that it can grow its production by 10% per year at current oil prices just from internally generated cash flow. Meanwhile, if oil moves higher, so does the growth potential. Penn West is estimating it can drive 15% compound annual production growth if oil were to average $60 a barrel going forward.
A closer look at the new core
Of the trio of assets that make up its new core, the Cardium is the crown jewel. At 19,500 BOE/d, it will produce the bulk of the company’s oil and gas going forward. On top of that, with netbacks that are more than $10 per BOE higher than the other two assets, it will also be its biggest driver of cash flow. Further, with more than 1,500 future well locations, it has the most drilling upside.
In addition to the Cardium, Penn West sees untapped growth potential at its Alberta Viking assets. While those assets only produce 1,000 BOE/d at the moment, the company estimates it could drill up to 500 more wells within its Alberta Viking acreage in the future. Those wells have the potential to create substantial value for the company thanks to exceptional drilling economics. For example, at US$50 oil the company’s rate of return would be a very lucrative 67% with it zooming to 124% at US$66 oil.
The final piece of the company’s new core is its Peace River oil partnership. While the company had initially planned to sell its stake in the project, it has decided to hold on to it because it generates stable cash flow. Currently, its joint-venture partner carries most of the costs for this project, enabling Penn West to capture more of the cash flow generated from its 5,000 BOE/d of production.
While the asset does have some upside, oil would need to move a lot higher before Penn West could capture that upside. In the meantime, the company will use the steady cash flow from Peace River to fund the development of Cardium and Alberta Viking.
Investor takeaway
With its balance sheet now completely repaired, Penn West Petroleum can focus its attention on driving growth from its reshaped core. Initially, Cardium will be counted on to drive the bulk of its growth. However, investors should keep an eye on the Alberta Viking position, which could be a significant value creator down the road. If those two plays deliver as planned, Penn West could be a top oil growth stock in the years ahead.
