Mr. Dave Roberts reports
PENN WEST ANNOUNCES $1.1 BILLION IN ASSET SALES, INCLUDING THE SALE OF ITS SASKATCHEWAN ASSETS FOR $975 MILLION
Penn West Petroleum Ltd. has entered into a definitive agreement for the sale of all of its Saskatchewan assets, including in its Dodsland Viking area, for cash consideration of $975-million, subject to normal closing adjustments. The Saskatchewan assets are split approximately evenly between medium and heavy oil properties in the west and the Dodsland light oil properties in the east. The purchaser is Teine Energy Ltd., a Viking producer backed by the Canada Pension Plan Investment Board.
This transaction, together with additional Alberta asset dispositions, for proceeds of approximately $140-million, is expected to close in the second quarter. The total cash consideration from asset dispositions to date in 2016 is approximately $1.3-billion, reducing its pro forma net debt to approximately $600-million from $2.1-billion at year-end 2015. As a result, it expects to be comfortably in compliance with all of its financial covenants at the end of the second quarter and the rest of 2016.
"Saskatchewan is a coveted asset amongst many of our competitors, and with this transaction, we have capitalized on the demand for high-quality oil assets of scale," commented David Dyck, senior vice-president and chief financial officer of Penn West. "This is a pivotal transaction for the company. While we have made significant progress over the past three years in reducing our total debt, this asset sale results in a markedly improved capital structure and positions the company in the top tier of our peers in terms of all significant debt metrics. Additionally, the sales metrics received are meaningfully above recent precedent transactions in the area and are very accretive to our shareholders."
The company expects to realize nearly $100-million annually as a result of decreased interest expenses and significant reductions in general and administrative expenses through this transaction, which more than offsets the loss in net operating income associated with the Saskatchewan properties (1).
The following are some of the key metrics and implied transaction multiples for the Saskatchewan properties based on the company's full-year 2016 forecast:
Production: 13,650 barrels of oil equivalent per day
Operating cost: $14.75 per boe
Field netback (1): $12.75 per boe
Proven plus probable reserves (2): 53 million boe
Implied production multiple: $71,400 per boe per day
Implied net operating income (NOI) multiple (1): 15 times
Implied 2P reserves multiple (2): $18.40 per boe
(1) Based on actual achieved commodity prices through May, 2016, and $60 per bbl Edmonton Par for the balance of 2016.
(2) Based on year-end 2015 working interest reserves.
The effective date of the Saskatchewan assets sale is May 1, 2016, and closing is expected to occur in the second quarter, subject to the receipt of all necessary regulatory approvals and the satisfaction of closing conditions customary in transactions of this nature.
In addition to the sale of its Saskatchewan properties and through a series of transactions, Penn West sold other Alberta properties for proceeds of approximately $140-million with associated 2016 production of 3,100 barrels of oil equivalent per day.
RBC Capital Markets acted as the company's exclusive financial adviser on these transactions.
Corporate update and transformation to a leading Alberta oil producer
The sale of the company's Saskatchewan assets is a key element of its transformation strategy allowing the company to streamline and high-grade the rest of its portfolio to once again increase reserves, production and funds flow from operations at a profitable and measured pace.
"While the Dodsland Viking was an important contributor to Penn West's growth profile in recent years, this transaction will allow us to replace these largely mature assets by funding the more prospective and numerous growth opportunities in our Cardium and Alberta Viking positions, areas where we are more focused and more competitive," commented Dave Roberts, president and chief executive officer of Penn West. "We forecast that the combination of a concentrated asset portfolio, lower operating cost base and reduced interest expense burden will allow us to grow the company's production by approximately 10 per cent annually well into the next decade, while still generating funds flow from operations in excess of our capital spending, at current commodity prices."
As the company continues to monetize its non-core assets over the balance of the year, its remaining operations will be focused in Alberta as follows:
The company's redefined Cardium area will be focused on its unsurpassed land position, encompassing 700 net sections and 1,500 drilling locations, or over 20 years of drilling activity. Its first quarter production in the Cardium area was approximately 19,500 boe per day with operating costs of $10 per boe and netbacks of $17 per boe. The company expects the Cardium to continue driving profitable liquids growth through a combination of water flood programs, infill drilling and new development for the foreseeable future. Recent production results from Cardium wells in both the Pembina and Willesden Green areas over the last two quarters continue to exceed expectations with production volumes meaningfully above historical type curves. Additionally, this transaction gives Penn West the financial flexibility to begin exploiting the multihorizon potential in its Cardium area. The company holds approximately 500 net sections in the Belly River and Mannville formations that it believes are highly prospective. These plays will form part of the development strategy that the company will be executing over the next several years.
In recent years, the company's technical understanding of the Viking play has extended into Alberta through an active farm-out program, as well as the exploratory findings and strong production results from offsetting peers. In the Alberta Viking, the company sees the opportunity to replicate its Dodsland experience, with similar strong economics, but with much higher-growth potential given the early-stage life cycle of the play. While the company's Alberta Viking first quarter production was only approximately 1,000 boe per day, the company expects this area will be an important focus of its 2017 development program and a key growth area in the foreseeable future. Its Alberta Viking position encompasses approximately 174 net sections and has over 500 potential drilling locations.
The Peace River area is focused on the company's Peace River Oil Partnership (PROP) with its joint venture partner. The company expects this area to remain a stable production and cash generation vehicle for the company, as approximately 90 per cent of its operating and capital costs are paid for by its partner. Its first quarter net production at Peace River was approximately 5,000 boe per day, 98 per cent weighted to crude oil, with operating costs of $1 per boe (3). Additionally, the company has had positive results from two thermal pilots in the area, and it expects that larger-scale thermal recovery, in a higher crude oil environment, would allow meaningful recovery of the significant oil potential in its Peace River acreage.
(3) Net of partner-carried operating costs.
The company is continuing to rationalize a number of remaining non-core assets throughout the rest of the year. It has a number of continuing asset sale processes, at various stages of completion, and anticipates divesting these remaining high-cost, largely negative net operating income properties by year-end. Total remaining production expected to be sold is approximately 20,000 boe per day with a range of values expected at $100-million to $200-million. Importantly, these transactions will also reduce the company's well count by approximately 5,000 wells and its asset retirement obligation by $200-million.
"Three years ago, Penn West embarked on a path to create the most competitive conventional oil producer in Western Canada. The journey was perhaps longer and more difficult than anyone expected as we have experienced the worst crude oil crash in over a decade. We persevered, and we can now see the most challenging time in our company's history coming to a close. As a result of our actions, we will have reduced debt by over $2.8-billion in the last three years, dramatically lowered our cost structure and meaningfully improved our operational execution. We are very excited to open a new chapter as our focused Alberta operations will create a top-quartile company with a strong and sustainable growth profile, operating costs of $10 to $12 per boe, and low leverage metrics," concluded Mr. Roberts.
The company's second-half 2016 development program of $5-million to $10-million is focused on the Peace River area, but the company is actively monitoring opportunities to increase spending on optimization and base maintenance activities. It is also reviewing plans to ramp up spending and development activity in the second half of the year as commodity prices continue to strengthen. It will be formalizing its 2017 activity plans in the coming months to profitably increase its production and cash flows. It expects that it will be able to deliver a plan with improved efficiencies, lower costs and meaningful reserve additions.
Guidance
The company expects to provide updated corporate guidance and more details on its 2017 plan in the near future.
Conference call and webcast details
A conference call and webcast presentation will be held to discuss the matters noted herein at 10 a.m. MT (12 p.m. ET) on June 13, 2016.
To listen to the conference call, please dial 647-427-7450 or 1-888-231-8191 (toll-free).
This call will be broadcast live on the Internet.
A digital recording will be available for replay two hours after the call's completion, and will remain available until June 24, 2016, at 9:59 p.m. Mountain Time (11:59 p.m. Eastern Time). To listen to the replay, please dial 416-849-0833 or 1-855-859-2056 (toll-free) and enter conference ID 28666425, followed by the number key.
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