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Penn West Shrinking to Grow After Staff Exits

Penn West Petroleum Ltd., the worst performing oil and natural gas stock among its Canadian peers this year, may sell more assets and forgo higher output to cut costs after the ouster of four executives.

The company will be “opportunistic” about selling acreage outside its primary oil developments, striving to reduce production costs and meet targets to boost returns, said Chairman John Brussa. Penn West fired Chief Operating Officer Hilary Foulkes and three vice presidents on Nov. 6, after reporting lower third quarter output than analysts’ expected and reducing its production outlook for 2012.

“We’re going to emphasize our dividend and we may not grow production,” Brussa said by phone from Calgary on Nov. 12. “We think we can grow cash flow by going from gas to oil.”

The company’s shares have plunged 48 percent this year, the worst among 16 Canadian oil and gas producers with market values above C$5 billion ($5 billion), according to data compiled by Bloomberg. Rising costs and concerns the company may be forced to cut its 10 percent dividend contributed to the decline. The shares closed down 1 percent at C$10.47 in Toronto, for a market value of C$5 billion.

“There needed to be a change,” said Vijay Viswanathan, who manages C$4.5 billion at Mawer Investment Management Ltd. in Calgary, including Penn West shares. “Now the big ‘if’ is, can the new management team execute better than before?”

‘Incrementally Positive’

The executive departures are “incrementally positive” as Penn West has “great assets but management needs to execute,” said Viswanathan, who’s not buying more Penn West shares as prices remain depressed. “The downdraft in the stock is just a product of investors getting sick of waiting.”

The Penn West board decided the four executives needed to leave after a review of the company’s production reliability and costs, Brussa said.

“The board was concerned about our efficiency, both on operating and bringing production on stream, for at least two months,” he said, discarding “rumors” he’s heard that the managers had abandoned the company. “There wasn’t a palace revolt.”

The company did not provide a reason for her firing, Wendy Henkelman, previously vice president of treasury, said in a phone interview from Calgary yesterday. Phone and e-mail messages left for Foulkes and the other departing executives were not immediately returned.

Penn West reported a third-quarter loss of C$67 million on Nov. 2, or 14 cents a share, versus a gain of C$138 million, or 29 cents, a year earlier. The company missed analyst production estimates, due to lower-than-forecast output tied to delays bringing facilities online and wet weather.

‘Operational Excellence’

Penn West Chief Executive Officer Murray Nunns, “a very talented individual” is staying on. “He is going to be part of the solution,” Brussa said.

The company appointed David Middleton, Penn West’s executive vice president of engineering, to lead operations while it searches for a new COO or senior engineering executive to replace Foulkes.

The company needs to focus on “operational excellence,” said Gordon Tait, an analyst at BMO Capital Markets Corp. in Calgary who rates Penn West the equivalent of a hold.

“Guidance was coming down, they seemed to be missing production numbers,” Tait said. “It would be a very well- received shift if their operations proved to be more reliable and predictable. You’d then see the stock price begin to reflect that.”

Penn West’s difficulties meeting targets on budget can partly be blamed on trying to integrate new properties it picked up during a period of fast growth last decade, Tait said.

Asset Sales

The company increased production about 58 percent to 177,310 barrels a day in 2009 from 2006. Output has declined since, figures compiled by Bloomberg show.

Penn West needs to shift towards strengthening operations and exploitation, over exploration, Tait said, telegraphing a transition Brussa also hinted at.

Penn West announced it would sell C$1.3 billion in assets producing the equivalent of 12,000 barrels a day outside its core operating areas by the end of the year, to bring down debt. The company’s debt totaled C$3.9 billion in the third quarter, 26 percent higher than a year earlier, figures compiled by Bloomberg show.

The company, which has more than six million acres (2.4 million hectares) across Western Canada according to its website, will contemplate selling more properties, Brussa said.

“We have a number of very key tight oil areas where we’re probably not going to be sellers but other assets, we’re going to be sellers,” he said.

Oil Shift

Penn West produces oil from so-called resource play areas across Western Canada, accessing reserves trapped in non-porous, or “tight” rock. The company extracts oil by drilling long wells horizontally underground and pumping a mixture of water, sand and chemicals down well bores to create fissures in the rock and force the flow of oil.

“Our strategy is to be on the cusp of the tight oil revolution in Western Canada,” Brussa said. “We’re the dominant player in four out of five of the plays.”

Rather than boosting overall output, Penn West is shifting production so more comes from oil versus gas, to fetch higher prices.

The company has made “considerable progress” since the third quarter of 2009 with the shift, boosting the share of its production that comes from oil to 66 percent and increasing what it earns for each equivalent barrel of crude by 9.1 percent to $28.28, Sam La Bell, an analyst at Veritas Investment Research Corp. in Toronto who rates the company a sell, said in a Nov. 5 note.

Maintain Dividend

The company will be forced to sell more assets after deals announced close, to improve its balance sheet, said Kam Sandhar, an analyst at Peters & Co. in Calgary who rates Penn West the equivalent of a sell.

Penn West has five buy, 11 hold and five sell ratings from analysts.

Penn West’s dividend of 10 percent would “likely” be cut, in turn, as production goes out the door, Sandhar said in a note to clients on Nov. 2.

The company, which has a large following among retail investors, can sustain its dividend with current agreements to sell assets, Brussa said. Uncertainty has contributed to the company’s share price decline, he said.

“There’s been all kinds of rumors that we’re going to cut our dividend, that our program is not sustainable, so you’ve had a lot of retail investors jump on the basis that they think they’re getting ahead of a dividend cut,” Brussa said.

To contact the reporter on this story: Rebecca Penty in Calgary at rpenty@bloomberg.net

To contact the editor responsible for this story: Susan Warren at susanwarren@bloomberg.net

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