Since September of last year, the percentage drop in Cardium formation drilling amounts to an astonishing 78%, and almost 90% since a January 2014 high (over the last 2 years).
With the vast majority of Cardium wells producing light oil, the recent downturn in oil prices has hit both this formation and the companies that are most active in the area hard. Whitecap Resources reduced drilling in the formation from five wells in January to only two in June of this year. Penn West, the most active driller with 139 wells drilled since 2013, has experienced significant financial difficulties since the price decline.
The company recently announced $500 million in capital spending this year, a 40% reduction from its original plan for the year, and will further reduce spending next year by $140 million to $250 million from this year’s level.
The cuts are necessary as Penn West struggles with a high debt load, says FirstEnery Capital analyst Michael Hearn.
Hearn said the company will need to sell assets to deal with its debt, but that mergers and acquisitions have been “sterilized” in the province with the new government and royalty review.
“As a board of directors how do you make a call on a significant investment when you don’t know what the royalties are going to end up being?” commented Hearn.
He said could see more cuts coming as low prices persist.
Penn West chief executive Dave Roberts said in a conference call with analysts that he expects the current cycle to be “prolonged and increasingly volatile” and has been forced to make cuts to weather the storm.
To reduce spending Penn West has not only cut jobs, but also suspended its dividend, cut board compensation by 40 per cent and further reduced this year’s capital budget.
The company also announced on September 1 that it would sell a number of non-core assets, to reduce overhead costs.
Two weeks later, on September 15, Penn West announced the sale of the “properties in the Greater Mitsue area of Central Alberta for cash consideration of $192.5 million…[intending] to use the proceeds from this disposition to reduce [our] senior debt.”
The Mitsue properties produced the equivalent of 4,500 barrels per day for the company. It was the first major sale of non-core assets for Penn West since it announced that it was cutting its workforce by 400 full-time employees and contractors, suspending its dividend and cutting compensation for its directors.
Despite the difficulties, Penn West remains focused on further development of the Viking and Cardium light oil properties for 2016. The company lowered its 2015 production forecast to 86,000 to 90,000 barrels of oil equivalent a day from 90,000 to 100,000 barrels previously.