Penn West Seen Gaining as CEO Considers Sales

Penn West Petroleum Ltd. (PWT), the Canadian energy producer that has dropped 58 percent in two years, is increasing its chance for recovery by appointing a new chief executive officer to cuts costs and weigh asset sales.

“My expectation is that the price moves higher as people see evidence the company is being operated better,” said Jim Hall, chief investment officer at Mawer Investment Management Ltd. in Calgary, who helps manage more than C$16 billion ($15 billion) including Penn West shares.

At least four analysts raised their target prices for Penn West yesterday after the Calgary-based producer said on June 4 that David Roberts, former chief operating officer of Marathon Oil Corp. (MRO), will replace Murray Nunns this month to head Penn West. The company said it would cut its dividend 48 percent and eliminate 10 percent of staff while Chairman Rick George pledged a “huge step change” in spending. The board said it is considering strategic alternatives including asset sales and joint ventures.

“With a focus on cost-cutting, there’s some promise that the assets will actually be valued at market value instead of at a huge discount,” Sam La Bell, a Toronto-based analyst with Veritas Investment Research Corp. who rates Penn West a buy, said yesterday in a phone interview. The dividend reduction to 14 cents from 27 cents in the third quarter will “close the gap” between spending and cash flow, La Bell said.

Worst Performance

Penn West’s dividend yield of about 10 percent is the highest among Canadian oil and gas producers with a market value of more than C$3 billion, while its one-year share performance is the worst, according to data compiled by Bloomberg. Penn West fell 4.4 percent to C$10.42 yesterday in Toronto, bringing its decline to 58 percent in the past two years.

The company was overspending to develop assets and pay a dividend that should have been lowered or eliminated years ago, Hall said. Roberts needs to boost capital efficiency and downsize Penn West, he said.

“What I hope for is that he decides to realize the value inside the company as it stands without selling it or breaking up the company,” Hall said, valuing Penn West’s assets at as much as C$18 a share. “Strategic alternatives is usually code for sale. Is he a gun for hire?”

Penn West, which produces the equivalent of about 142,800 barrels of oil a day across Western Canada, may look to sell its acreage in the Duvernay liquids-rich shale formation in Alberta, its stake in the Peace River oil-sands partnership, or spin out some of its assets into an “exploration-type company,” La Bell said.

Financial Flexibility

“We’re going to look at every single option to increase shareholder value,” George told reporters after the company’s annual meeting in Calgary yesterday. “Having said that, we think there’s huge value in the continuous improvement and driving forward this company with the asset base it has.”

Roberts wasn’t available for an interview, Clayton Paradis, a Penn West spokesman, said in an e-mail yesterday.

The dividend reduction will allow Penn West to “repair the balance sheet,” George said at the company’s annual meeting in Calgary yesterday.

A lower dividend was disappointing, though expected, according to Ryan Bushell, who helps oversee C$2.1 billion at Leon Frazer and Associates Inc. in Toronto. Calgary lawyer John Brussa, Penn West’s chairman of eight years who George replaced in the role last month, favored a high payout to shareholders over growth, Bushell said. George is the former CEO of Suncor Energy Inc., Canada’s largest energy company by market value.

Latest Reduction

“When we look for a commodity company, we look for one that has a long inventory to support an ongoing payout going forward,” Bushell said yesterday in a phone interview. “If you blow through that inventory, you have to find more.”

The company is the latest former energy trust to lower its dividend after Bonavista Energy Corp. (BNP), Enerplus Corp. and Pengrowth Energy Corp. announced reductions of the payouts last year, as lower gas prices crimped profits.

Penn West’s net income fell 73 percent to C$174 million in 2012 as revenue declined amid slumping gas prices.

Roberts comes across as a knowledgeable and “low key” person who was once viewed as a successor to Marathon Oil Chief Executive Officer Clarence Cazalot, Fadel Gheit, an analyst at Oppenheimer & Co. in New York, said yesterday by phone.

Marathon Oil endured some stumbles during Roberts’ tenure, including the deep-water Droshky project in the Gulf of Mexico that the company said had disappointing results. Marathon Oil could have been more of a leader in the Bakken formation in the U.S., Gheit said.

Marathon Oil announced last year that Roberts was resigning to pursue other interests effective Dec. 14.

Roberts provides a “fresh set of eyes” to help the company reduce operating costs and boost capital efficiencies, George said. “You should see vast improvements here in the next six months,” he said. “I would expect this company to be in a very different place 12 months from now.”

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

To contact the editors responsible for this story: Susan Warren at susanwarren@bloomberg.net; David Scanlan at dscanlan@bloomberg.net

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