CALGARY, Sept. 1, 2015 /CNW/ – PENN WEST PETROLEUM LTD. (TSX – PWT;
NYSE – PWE) (“Penn West“, “we“, “us” or “our“) announces it has taken the following further actions in response to
the current commodity price environment:
- we will limit our capital expenditures to funds flow from operations by year-end 2015
- we will suspend our dividend and reduce board compensation
- we will significantly reduce our cost structure through a 35% workforce reduction
“We continue to take concrete steps to strengthen our balance sheet,”
said Dave Roberts, President and CEO of Penn West, “Limiting our
capital programs to the funds flow generated from our assets and
suspending our dividend are necessary steps. Building on a combination
of process and efficiency improvements over the past 12 to 18 months,
we are taking further actions today to significantly reduce our cost
structure without impacting our ability to execute. We remain flexible
and well positioned to move forward when oil prices improve.”
Limit Capital Expenditures to Funds Flow from Operations
Going forward, our total capital expenditures will remain within our
funds flow from operations. Over the last month, we have identified
$75 million of planned 2015 capital activity that will be deferred,
which is incremental to the $50 million capital spending reduction
announced as part of our second quarter results. This $500 million
revised capital budget represents a 40% reduction from the original
November 2014 guidance of $840 million. We will continue to look for
additional opportunities to further reduce our 2015 capital
expenditures.
We have a significant inventory of wells already drilled and awaiting
either completion or tie-in where there is a strong economic case for
completing the work. While we finish these wells, we anticipate being
above our target activity levels which we will reach near the end of
the year. In finalizing plans for our 2016 capital program, we will
limit our capital expenditures to estimated funds flow from operations
on a full year basis.
We will focus our development capital on our core Viking and Cardium
light oil properties in 2016. These light oil plays continue to offer
attractive rates of return with short payback periods even at current
commodity price levels and existing cost structures. Development will
be directed towards primary exploitation in order to reduce payback
periods.
| Area | Select First Half 2015 Metrics | |||
| Production | Liquids Weighting | Operating Cost | Netback | |
|
Cardium Greater Viking Slave Point(1) |
29,500 boe/d 18,500 boe/d 6,000 boe/d |
66% 87% 97% |
$14.50/boe $16.00/boe $20.00/boe |
$21.50/boe $23.50/boe $25.00/boe |
| Total Core | 54,000 boe/d | 76% | $15.50/boe | $22.50/boe |
| (1) |
We anticipate limited investment at Slave Point at current commodity price levels. |
Suspension of Dividend
Our Board of Directors has decided to suspend our dividend until further
notice following the payment on October 15, 2015 of the most recently
declared dividend. We estimate this action will reduce annual cash
outlays by approximately $20 million. The $0.01 per share dividend
declared by our Board of Directors on July 30, 2015 will still be paid
on October 15, 2015 to shareholders of record at the close of business
on September 30, 2015.
In addition, effective today, our Board of Directors has voluntarily
decreased the annual retainers payable to non-management directors. In
particular, the annual retainer payable to the Board Chair will be
reduced by 50%, while the annual retainers payable to the remaining
non-management directors will be reduced by 40%.
“The Board of Directors is committed to ensuring the long-term
sustainability of Penn West,” commented Rick George, Board Chair of
Penn West, “We view the suspension of the dividend and the reduction of
board compensation as important steps toward achieving that goal.”
Reduction of Current Cost Structure
We will reduce our total workforce by 35%, representing over 400 full
time employees and contractors, with most of this reduction being
effective immediately. The remainder of this workforce reduction is
expected to be completed by the end of the year. Most of the employees
and contractors leaving are located in our head office in Calgary. The
total cost savings associated with this workforce reduction are
expected to be approximately $45 million per year.
“We have made a number of exceptionally difficult decisions in order to
remain competitive in the current commodity price environment,” Dave
Roberts commented, “We view the cost reductions as sustainable and we
will remain well positioned for the potential expansion of development
activities and capital programs in the future.”
Continued Covenant Compliance
We continue to be in compliance with all of the financial covenants in
our syndicated bank facility and senior notes. At June 30, 2015,
Senior Debt to EBITDA was 3.2 times, relative to the 5.0 times limit
that we negotiated with our lenders, and which will remain in effect
until the end of Q2 2016. The covenant limit will decrease to 4.5
times for Q3 2016, to 4.0 times for Q4 2016 and to 3.0 times starting
in Q1 2017. We currently have approximately $750 million of undrawn
capacity under our $1.2 billion syndicated bank facility. Unlike many
of our industry peers, availability under our syndicated bank facility
is not based on a borrowing base calculation and therefore is not
subject to redeterminations prior to its scheduled maturity in May
2019.
We remain committed to identifying alternatives to increase our
financial flexibility and maintaining our ongoing compliance with all
of our financial covenants. We view the monetization of our existing
foreign exchange hedges as one such alternative. Currently, these
hedge contracts hold a positive mark to market value of approximately
$75 million. We plan to monetize these hedges as required in the
second half of the year.
As a result of the reduction in our workforce, we anticipate recording a
one-time charge related to severance costs during the third quarter. We
expect that these costs will be excluded from our funds flow from
operations and EBITDA metrics.
Initiatives Already in Progress
Additional Non-Core Asset Sales to Reduce Debt
Over the past two years, we have divested an estimated 30,000 boe/d of
non-core assets for proceeds of approximately $1.5 billion. This has
allowed us to reduce debt by over one third, which is a significant
achievement in this market.
We are committed to pursuing additional non-core asset sales in an
effort to further reduce debt and strengthen our balance sheet. These
assets offer attractive upside to strategic buyers who are better
positioned to maximize their potential through additional
capitalization. While the current commodity price environment poses
challenges, we will continue to take a disciplined approach to our
process and we remain confident in our ability to complete additional
transactions to further advance our goal of debt reduction.
As we are successful in divesting of our non-core assets, we expect to
realize an additional 15% to 30% reduction in our overhead costs.
| Area | H1 Production | Liquids Weighting |
|
Swan Hills NE BC & NW AB East Central AB Mitsue PROP Weyburn Other |
8,000 boe/d 8,000 boe/d 7,000 boe/d 4,500 boe/d 3,000 boe/d 2,500 boe/d 1,000 boe/d |
76% 8% 41% 78% 97% 100% 55% |
| Total Non-Core (1) | 34,000 boe/d | 56% |
| (1) |
Note that the 2014 aggregate year end reserve values for the non-core properties above are based on Sproule Associates Limited forecast price deck as at December 31, 2014 were $1.2 billion Proved Developed Producing and $2.1 billion Proved Plus Probable. |
Further Cost Reductions
Over the last 18 to 24 months, we have reduced our absolute operating
costs by over 20% at our existing properties excluding the impact of
divestitures. Furthermore, our well costs in both the Viking and
Cardium are down 20% to 30% relative to mid 2014.
We will continue to focus on operating our business in a more efficient
manner, allowing us to be more competitive and performance driven. We
will do things more efficiently and at lower cost, while maintaining
our focus on safe and responsible operating practices. In particular,
over the next 12 to 18 months, we anticipate:
-
up to a further 10% reduction in our individual well drilling, completion, equip and
tie-in costs as well as associated facilities relative to where we are
at today, in addition to efficiencies realized since mid 2014 -
up to a further 10% reduction in our total operating expenses relative to current run
rates, incremental to savings realized in the last 18 to 24 months
Farmouts
As part of our efforts to control spending and reduce drilling risk
while maximizing the value of our large land base, we will continue to
actively pursue farm-out opportunities. Over the last year we have
been successful in securing approximately 91 gross well commitments, of
which 39 have been spud to date. Through these farm-out agreements, we
expect to receive income from these wells through either a royalty
interest or working interest structure without having to fund any of
the capital outlays.
Commodity Hedging Program
Our existing hedging program is expected to help reduce the volatility
of our funds flow from operations, and thereby improve our ability to
align capital programs. We target having hedges in place for
approximately 25% to 40% of our crude oil exposure, net of royalties,
and 40% to 50% of our gas exposure, net of royalties. We will seek to
layer on these positions over a longer period of time in a systematic
fashion, subject to market conditions. We have already reached the
lower end of our crude oil and natural gas target levels for the
remainder of 2015. Our existing positions are as follows:
| Q3 2015 | Q4 2015 | Q1 2016 | Q2 2016 | Q3 2016 | Q4 2016 | |
|
Volume (bbl/d) Price (C$/bbl)(1) Volume (mmcf/d) Price (C$/mcf) |
12,500 $70.40 70 $2.86 |
12,500 $72.57 70 $2.86 |
9,500 $72.83 19 $3.08 |
6,000 $71.94 19 $3.08 |
5,000 $72.08 19 $3.08 |
5,000 $72.08 19 $3.08 |
| (1) |
5,000 bbl/d of $US contacts in Q3 2015 illustratively converted to C$ at a rate of C$1.30/US$ |
Updated 2015 Guidance
We have updated our guidance given the impact of the $414 million in
asset dispositions to date and the further planned reductions in our
capital programs. Our revised 2015 capital budget is $500 million,
representing capital expenditures of approximately $245 million in the
second half of 2015. Our revised 2015 production guidance range is
86,000 – 90,000 boe/d. Although we continue to view funds flow from
operations to be an important metric, we will shift our focus to
providing guidance on our controllable costs given the continuing
volatility in commodity prices. Consequently, we expect our operating
costs for the year to be between $19.25/boe and $19.75/boe, while our
G&A is expected to be between $2.80/boe and $3.05/boe.
Conference Call Details
A conference call and webcast presentation will be held to discuss the
matters noted above at 8:00 a.m. Mountain Time (10:00 a.m. Eastern
Time) on September, 1, 2015.
To listen to the conference call, please call 647-427-7450 or
1-888-231-8191 (toll-free). This call will be broadcast live on the
Internet and may be accessed directly at the following URL:
http://event.on24.com/r.htm?e=1041938&s=1&k=5E7BA917461D1AE08490F654B2574B04
A digital recording will be available for replay two hours after the
call's completion, and will remain available until September 15, 2015
21:59 Mountain Time (23:59 Eastern Time). To listen to the replay,
please dial 416-849-0833 or 1-855-859-2056 (toll-free) and enter
Conference ID 26816650, followed by the pound (#) key.
About Penn West
Penn West is one of the largest conventional oil and natural gas
producers in Canada. Our goal is to be the company that redefines oil
& gas excellence in western Canada. Based in Calgary, Alberta, Penn
West operates a significant portfolio of opportunities with a dominant
position in light oil in Canada on a land base encompassing
approximately 4.3 million acres.
Penn West shares are listed on the Toronto Stock Exchange under the
symbol PWT and on the New York Stock Exchange under the symbol PWE.
All dollar amounts herein are in Canadian dollars.
Non-GAAP Measures
This news release includes non-GAAP measures not defined under
International Financial Reporting Standards (“IFRS“) including funds flow, funds flow from operations and netback.
Non-GAAP measures do not have any standardized meaning prescribed by
GAAP and therefore may not be comparable to similar measures presented
by other issuers. Funds flow is cash flow from operating activities
before changes in non-cash working capital and decommissioning
expenditures. Funds flow and funds flow from operations are used to
assess the Penn West's ability to fund dividend and planned capital
programs. Funds flow from operations excludes the effects of financing
related transactions from foreign exchange contracts and debt
repayments/ pre-payments and is more representative of cash related to
continuing operations. See “Calculation of Funds Flow/Funds Flow From
Operations” below for a reconciliation of funds flow to its nearest
measure prescribed by IFRS. Netback is the per unit of production
amount of revenue less royalties, operating expenses, transportation
and realized risk management gains and losses, and is used in capital
allocation decisions and to economically rank projects.
| Calculation of Funds Flow/Funds Flow From Operations | |||||||||
| (millions, except per share amounts) |
Three months ended June 30 |
Six months ended June 30 |
|||||||
| 2015 | 2014 | 2015 | 2014 | ||||||
| Cash flow from operating activities | $ | (67) | $ | 214 | $ | 89 | $ | 436 | |
| Change in non-cash working capital | 109 | 77 | 54 | 111 | |||||
| Decommissioning expenditures | 5 | 7 | 16 | 20 | |||||
| Funds flow | 47 | 298 | 159 | 567 | |||||
| Monetization of foreign exchange contracts | (19) | – | (63) | – | |||||
| Settlements of normal course foreign exchange contracts | (23) | (2) | (25) | (2) | |||||
| Realized foreign exchange loss – debt prepayments | 44 | – | 44 | – | |||||
| Realized foreign exchange loss – debt maturities | 30 | 3 | 36 | 3 | |||||
| Funds flow from Operations | $ | 79 | $ | 299 | $ | 151 | $ | 568 | |
Oil and Gas Information Advisory
Barrels of oil equivalent (“boe”) may be misleading, particularly if
used in isolation. A boe conversion ratio of six thousand cubic feet
of natural gas to one barrel of crude oil is based on an energy
equivalency conversion method primarily applicable at the burner tip
and does not represent a value equivalency at the wellhead. Given that
the value ratio based on the current price of crude oil as compared to
natural gas is significantly different from the energy equivalency
conversion ratio of 6:1, utilizing a conversion on a 6:1 basis is
misleading as an indication of value.
Forward-Looking Statements
Certain statements contained in this document constitute forward-looking
statements or information (collectively “forward-looking statements”)
within the meaning of the “safe harbour” provisions of applicable
securities legislation. Forward-looking statements are typically
identified by words such as “anticipate”, “continue”, “estimate”,
“expect”, “forecast”, “budget”, “may”, “will”, “project”, “could”,
“plan”, “intend”, “should”, “believe”, “outlook”, “objective”, “aim”,
“potential”, “target”, “pursue” and similar words suggesting future
events or future performance. In addition, statements relating to
“reserves” or “resources” are deemed to be forward-looking statements
as they involve the implied assessment, based on certain estimates and
assumptions, that the reserves and resources described exist in the
quantities predicted or estimated and can be profitably produced in the
future. In particular, this document contains forward-looking
statements pertaining to, without limitation, the following: limiting
our capital expenditures to funds flow from operations by year-end
2015; suspending our dividend following the payment scheduled on
October 15, 2015 and reducing board compensation; reducing our cost
structure through a 35% workforce reduction; continuing to look for
additional opportunities to reduce 2015 capital expenditures; reaching
targeted activity levels by the end of 2015; focusing development
capital on our core Viking and Cardium light oil properties in 2016;
limiting investment at Slave Point and directing development towards
primary exploitation; expected reductions in cash outlays from
suspending our dividend; completing our expected 35% workforce
reduction by the end of 2015; the total cost savings associated with
this workforce reduction and the view of the overhead reductions as
sustainable; maintaining our ongoing compliance with all of our
financial covenants; the planned monetization of our existing foreign
exchange hedges in the second half of 2015; our commitment to pursuing
additional non-core asset sales and debt reduction; our expectation to
realize an additional 15% to 30% reduction in overhead costs as a
result of any successful divestiture of non-core assets; our
anticipation of further reductions of up to 10% in our individual well
drilling, completion, equip and tie-in costs as well as associated
facilities and up to a 10% reduction in our total operating expenses;
continuing to actively pursue farm-out opportunities; our plan to add
to our current hedge positions; and our expected 2015 production
guidance and controllable costs for the year (including operating costs
and general and administrative costs).
With respect to forward-looking statements contained in this document,
we have made assumptions regarding, among other things: our ability to
complete non-core asset sales and the terms and timing of any such
sales; the economic returns that we anticipate realizing from
expenditures made on our assets; future crude oil, natural gas liquids
and natural gas prices and differentials between light, medium and
heavy oil prices and Canadian, WTI and world oil and natural gas
prices; future capital expenditure levels; future crude oil, natural
gas liquids and natural gas production levels; drilling results; future
exchange rates and interest rates; future taxes and royalties; the
continued suspension of our dividend (after the payment scheduled for
October 15, 2015) and our dividend reinvestment plan; our ability to
execute our capital programs as planned without significant adverse
impacts from various factors beyond our control, including weather,
infrastructure access and delays in obtaining regulatory approvals and
third party consents; our ability to obtain equipment in a timely
manner to carry out development activities and the costs thereof; our
ability to market our oil and natural gas successfully; our ability to
obtain financing on acceptable terms, including our ability to renew or
replace our syndicated bank facility; our ability to finance the
repayment of our senior unsecured notes on maturity; and our ability to
add production and reserves through our development and exploitation
activities. In addition, many of the forward-looking statements
contained in this document are located proximate to assumptions that
are specific to those forward-looking statements, and such assumptions
should be taken into account when reading such forward-looking
statements.
Although we believe that the expectations reflected in the
forward-looking statements contained in this document, and the
assumptions on which such forward-looking statements are made, are
reasonable, there can be no assurance that such expectations and
assumptions will prove to be correct. Readers are cautioned not to
place undue reliance on forward-looking statements included in this
document, as there can be no assurance that the plans, intentions or
expectations upon which the forward-looking statements are based will
occur. By their nature, forward-looking statements involve numerous
assumptions, known and unknown risks and uncertainties that contribute
to the possibility that the predictions, forecasts, projections and
other forward-looking statements will not occur, which may cause our
actual performance and financial results in future periods to differ
materially from any estimates or projections of future performance or
results expressed or implied by such forward-looking statements. These
risks and uncertainties include, among other things: the possibility
that we will be unable to complete all or some of our planned non-core
asset dispositions; the possibility that we breach one or more of the
financial covenants pursuant to our amending agreements with the
syndicated banks and the holders of our senior secured notes; the
possibility that we will not be able to realize anticipated costs
savings as a result of our workforce reduction and other initiatives;
the impact of weather conditions on seasonal demand; the impact of
weather conditions on our ability to execute capital programs; the risk
that we will be unable to execute our capital programs as planned
without significant adverse impacts from various factors beyond our
control, including weather, infrastructure access and delays in
obtaining regulatory approvals and third party consents; risks inherent
in oil and natural gas operations; uncertainties associated with
estimating reserves and resources; competition for, among other things,
capital, acquisitions of reserves, resources, undeveloped lands and
skilled personnel; incorrect assessments of the value of acquisitions
or dispositions; geological, technical, drilling and processing
problems; general economic and political conditions in Canada, the U.S.
and globally; industry conditions, including fluctuations in the price
of oil and natural gas, price differentials for crude oil and natural
gas produced in Canada as compared to other markets, and transportation
restrictions, including pipeline and railway capacity constraints;
royalties payable in respect of our oil and natural gas production and
changes to government royalty frameworks; changes in government
regulation of the oil and natural gas industry, including environmental
regulation; fluctuations in foreign exchange or interest rates;
unanticipated operating events or environmental events that can reduce
production or cause production to be shut-in or delayed, including
extreme cold during winter months, wildfires and flooding; failure to
obtain regulatory, industry partner and other third-party consents and
approvals when required, including for acquisitions, dispositions and
mergers; failure to realize the anticipated benefits of dispositions,
acquisitions, joint ventures and partnerships, including those
discussed herein; changes in tax and other laws that affect us and our
securityholders; the potential failure of counterparties to honour
their contractual obligations; stock market volatility and market
valuations; the global supply and demand of crude oil; political
uncertainty, including the risks of hostilities, in the petroleum
producing regions of the world; and the other factors described in our
public filings (including our Annual Information Form) available in
Canada at www.sedar.com and in the United States at www.sec.gov.
Readers are cautioned that this list of risk factors should not be
construed as exhaustive.
The forward-looking statements contained in this document speak only as
of the date of this document. Except as expressly required by
applicable securities laws, we do not undertake any obligation to
publicly update or revise any forward-looking statements, whether as a
result of new information, future events or otherwise. The
forward-looking statements contained in this document are expressly
qualified by this cautionary statement.
SOURCE Penn West
