Penn West Petroleum Ltd.’s Stunning Turnaround in Just 3 Numbers

Penn West Petroleum Ltd. (TSX:PWT)(NYSE:PWE) has improved dramatically over the past year.

| More on:
The Motley Fool
You’re reading a free article with opinions that may differ from The Motley Fool’s premium investing services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn more

Penn West Petroleum Ltd. (TSX:PWT)(NYSE:PWE) completed a dramatic turnaround last year. Thanks to a significant asset sale as the clock ticked away towards a looming debt deadline, and a meaningful improvement in costs, the Canadian driller is back on solid ground. The company is in the position where it can deliver strong growth at current commodity prices, which should create value for its investors over the long term.

Here are three numbers that show just how dramatically the company has improved over the past year.

A 76% reduction in debt

The catalyst for Penn West Petroleum’s turnaround was the completion of several asset sales that not only repaid debt but simplified the company’s portfolio. Overall, the company closed $1.4 billion in asset sales last year. More importantly, despite the company’s financial troubles, it did not sell these assets at fire-sale prices. Instead, it received a premium to the value of the reserves, which were an estimated $1.1-1.2 billion.

By selling assets above that value, the company was able to deliver a remarkable 76% decrease in total debt by year-end:

PWE debt.png

Data source: Penn West Petroleum Ltd. Chart by author. In millions of Canadian dollars.

Meanwhile, the company’s leverage ratio has improved from nearly breaching its five times financial covenant to less than two times debt-to-funds from operations. Further, another benefit of jettisoning those assets is that the company has also reduced its asset retirement obligations from $397 million at the end of 2015 to $182 million at the end of last year.

Penn West has more balance sheet improvements on the way. The company recently completed an additional $65 million of asset sales and should close a final $10 million sale shortly. Those sales, combined with the expectation that it will generate free cash flow, should push its total debt down to $400 million by the end of the first quarter.

A 12% improvement in cash margins

One of Penn West’s other focuses last year was to improve its costs, which would enable it to make more money per barrel of production while also stretching its capital dollars. The company completed several initiatives to drive out costs, including selling some lower-margin assets. The net result was a 12% improvement in its netback despite a lower realized commodity price last year:

PWE margins

Data source: Penn West Petroleum Ltd. Chart by author.

Penn West expects margins to continue improving in 2017. The company’s aim is to boost its netback up to a range of $20-22 per BOE this year due to the expectation for higher oil prices than last year as well as benefiting from the lower operational costs of a more focused portfolio.

A 3% drop in the corporate decline rate

Oil production is a very capital-intense business. Drillers are in an endless cycle of reinvesting capital back into their asset base to both offset declining output from legacy wells and grow production. One thing Penn West has done over the past year is to reduce the amount of oil production it needs to replace each year by finding ways to shrink its decline rate.

These efforts are paying off, evidenced by the fact that the company’s corporate decline rate has improved from 22% at the end of 2015 to a current rate of 19%.

More of the company’s capex budget is going towards growth spending instead of maintenance. In fact, at the company’s current $180 million budget, the improving decline rate has freed up an incremental $15 million of capital it can now allocate to growth projects. For perspective, that’s enough money to enable Penn West to drill three wells in prospective zones as it tests its acreage. The company’s aim is to get its decline rate down to 15% in the future, which would free up another $20 million in growth capital.

Investor takeaway

Penn West Petroleum has come a long way over the past year. While the company’s ability to sell assets above the reserve value helped get the ball rolling, the initiatives to lower costs and the corporate decline rate have also helped in its turnaround efforts. The net result is a company that now has what it takes to thrive at lower oil prices.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Matt DiLallo has no position in any stocks mentioned.

More on Energy Stocks

energy oil gas
Energy Stocks

2 Energy Companies to Buy When the Sector Hits Rock Bottom

Multiple factors, including the TSX decline, are contributing to the current slump in the energy sector.

Read more »

think thought consider
Energy Stocks

Energy Stocks Dip: To Buy or Not to Buy?

Most energy stocks are risky investments, because of their unpredictable profitability. Investors should tread carefully.

Read more »

Gas pipelines
Energy Stocks

2 Energy Stocks I’d Buy for Passive Income and Turnaround Upside

Canadian Natural Resources (TSX:CNQ)(NYSE:CNQ) and another top TSX energy stock could bounce back, as oil prices find their footing.

Read more »

oil tank at night
Energy Stocks

Oil Finally Crashed: Is the Party Over?

Recently, oil stocks like Cenovus Energy (TSX:CVE) crashed. Is the energy party over?

Read more »

data analyze research
Energy Stocks

TSX Stock Picks With Huge Potential

If you want a TSX stock that's bound for even more strong growth, these three are top picks by analysts.

Read more »

oil and natural gas
Energy Stocks

Can Cenovus Stock Outperform in H2 2022?

Is now the time for investors in Cenovus (TSX:CVE)(NYSE:CVE) stock to buy more, or wait out this volatility right now?

Read more »

Hand arranging wood block stacking as step stair with arrow up.
Energy Stocks

NexGen Energy: The Top Uranium Stock Set to Double in 2022

NexGen (TSX:NXE)(NYSE:NXE) stock is one of the top uranium stocks to consider right now with the potential to double in…

Read more »

energy industry
Energy Stocks

Why Suncor Energy (TSX:SU) Stock Has Declined 20% in June

Will Suncor Energy stock climb back up to $50 again?

Read more »