I like comparison sequential quarters rather than y-o-y as sequentials shows the current progress. Specifically for Penn West y-o-y makes no sense for obvious reasons.
Q4 over Q3 makes sense to see the progress as $75mm assets were sold at the beginning of Q3. Here are major metrics:
Q3 Q4
Revenue, mm 136 133
FFO, mm 32 48
Production:
Light oil and NGL 17,634 15,803
Heavy oil 5,711 5,493
NG, mm cf/d 107 103
Total, boed 41,233 38,481
Long Term Debts $464 $469
LOC $5 $6
Cash - - $11
Asset sales waiting - -$75
Proforma LT debts $469 $389
Ebitda $242 $235mm
Total Senior Debts $469 $475
D/ebitda for covenants 1.95 2.02 - much below 3
Benchmark prices:
WTI USD $44.95 $49.29
Edmonton sweet $54.68 $61.58
NG Aeco CAN $2.26 $2.95
Penn West average sales price:
Light oil $53.97 $58.76
Heavy oil $21.67 $27.09
NGL $17.91 $25.09
NG, CAN $2.46 $2.98
Benchmark differentials:
WTI-Edm light $2.96 $3.11
WTI-WCS heavy $13.5 $14.32
As seen some progress was made. Some additional non-core was recently sold targeting total debts below $400mm.
FFO was substantially improved despite lower production. $4 improved in WTI was helping, but substantially more help (in %%) was obtained from NGL and NG.
I was posting few times in recent months and even complaining to IR about very weak heavy oil prices in Q3, ~$7 below similar at Baytex. Some progress was made. PWE realized prices improved by $5.5 q-o-q despite WTI improvement by only $4 and wider differential by $0.80. So the net improvement was $2.3 excluding benchmark differences.
I didn't compare gains/losses from hedging as they were similar in Q3/Q4 and have little impact longer term.
Q3 can be identified as the bottom in terms of core production - 21.9K boed (Q4 had 25K boed at exit while 28,655 Q4 average including 4.3K retained legacy).
Q4 can be identified as the bottom in terms of reserves.
All reserves were adjusted according to large asset sales in 2016. Water flood added 2mm bls in reserves mostly in Willesden Green, a lot more will be added from Pembina this year.
Total recycle ratio was 1.1, small, but still positive despite basically not drilling in Q1-Q3 (no completions in Q3).
Another interesting development is in materially improved NGL prices. As seen in bold in the table NGL realized prices are just 8% below heavy oil prices, albeit heavy oil prices are well too low.
In fact NGL prices are 33% off 2014 average while WTI is off by 50%. This is because NGL prices have risen by 80% since Q1-16 while QTI - by 50%.
Higher NGL prices could make Mannville development more economical. Even if I'm not a fan of Mannville, the management was referencing economics at current prices at CC.
Mannville could potential produce 18-24% NGL according to management projections of 30-40 bbl per million.
I like their intention to improve asset economics before selling. They plan to re-complete and re-activate legacy wells to make them profitable. If you want to sell a house, you make some cosmetic improvements like painting, replacing broken faucets, some repair. Previous management didn't do anything, just disposing at poor conditions and as a result received low ball prices except for Dodsland.
I generally like their decision to keep legacy assets for now. That provides higher production base and motivate them to keep 15% growth rates. At the guided midpoint the growth would be down to 12%, but at high point of the range - closer to 15%. They have saved a full year by adding those 4.3K boed and increased chances for selling the company and receive good price in 12 months.
I was posting few times that I was struggling to understand why so many good wells produced so few barrels in Q4. Now it is understandable.
Penn West manages carefully production increase by new wells. They have three phases instead of typical two - Drilling, completion, putting on line.
I knew they put on line all 3 WG wells in January, but I didn't know how many Viking and Peace River wells were started in Q1 instead of Q4. Some of them may be optimized even next quarter. But Q1 will give us much better picture, and the next report will be in just 1.5 months.
However be prepare that many new wells scheduled for H2 2017 will actually be put on production in 2018. That strategy helps to minimize fluctuations and meeting guidance as they want.
A few notes about conference call. Is it only me or somebody else noticed that three asset management firms were attending? I don't remember them in the past. Those firms are not listed as large holders. I believe they are new and explored investing in Penn West. Their questions were specific for future goals instead of just clarification of the past quarter. One guy even asked about 2018-2019 FFO?? That clearly suggests he was going to invest in Penn West.
Expect new investors to come in. This is the big deal. This is what Penn West was lacking in prior years - better investor's base from institutions.
TD was also asking specific questions like why royalty was sold instead of legacy and some other questions. He was satisfied with responds about potential increase in Viking investments (me too btw). So today's upgrade was not a surprise, he was going to CC with already upgrade intention.
Penn West is at the new start. Instead of focusing on asset disposition it is focusing on production growth, FFO growth and creating shareholder value. This is new chapter with much more pleasure to watch. GLTA
Best wishes,
romm