Penn West completed a five-month review in October with a plan to focus on fewer production areas while reducing costs and debt. Chief Executive Officer Dave Roberts, who joined the company in June, has cut 25 percent of the workforce and lowered the dividend to help boost cash flow. Penn West is also selling as much as C$2 billion ($1.89 billion) in assets.
“This is a company that hasn’t always kept its promises, so right now the market is in a wait-and-see mode,” the 53-year-old Roberts said in a Nov. 19 phone interview. “People are going to start seeing that Penn West is back.”
The stock sank 16 percent the day Penn West announced its business plan didn’t include a sale. The new five-year strategy includes a period of falling output after asset sales before production increases in 2015.
Investors had anticipated that a new CEO and changes in the company’s board would produce a “grand strategic exit,” Roberts said. The board considered a sale and ultimately decided on the new plan, he said. “We will remain open-minded as we continue to drive the company to better and better results.”
Penn West has dropped 26 percent in the past three months, the worst performance on the Standard & Poor’s/TSX Energy Index, which gained 2.3 percent over the period, according to data compiled by Bloomberg. The stock, which has three buy, 14 hold and five sell recommendations from analysts, rose 0.1 percent to C$8.98 at 4:23 p.m. today in Toronto.
The company has missed analysts’ estimates for adjusted earnings per share in five of the past eight quarters. Oil and natural gas production has fallen for five straight quarters on a per-share basis, according to figures compiled by Bloomberg.
Bearish investors have reduced their bets against Penn West as the stock has fallen, signaling the worst of the selloff may be over. Short interest was 6.3 percent of shares outstanding on Nov. 25, down from 16 percent in September, according to data compiled by Bloomberg and Markit, a London-based provider of financial information services.
The short interest is still above the 5.1 percent average for companies in the Standard & Poor’s/TSX Composite Index.
“You could still arguably make money on this thing on the short side,” John Stephenson, who helps oversee C$2.7 billion at First Asset Investment Management Inc. including Penn West shares, said in a Nov. 15 phone interview. “Any investor needs to wait three-quarters of a year or a year before they throw a dime at it.”
The strategy includes deals in place to sell C$480 million in assets by year-end. As Penn West directs spending to lower-cost areas, such as the Viking near Dodsland, Saskatchewan, cash flow is forecast to rise 19 percent a year from 2014 to 2018 and oil output will increase 13 percent a year starting in 2015, according to the plan. Penn West expects to maintain a quarterly dividend of 14 Canadian cents a share.
The company’s dividend yield was 6.2 percent yesterday, which compares with a 2.2 percent yield at Canada’s biggest company by market value, Suncor Energy Inc. and a 5.6 percent yield at Enerplus Corp., the next-largest Canadian oil and gas producer after Penn West.
‘On the Mark’
Penn West will meet targets that include reducing by more than 50 percent its ratio of debt-to-cash-flow by 2016 and will sell more assets “sooner rather than later” in 2014, the CEO said.
“In a turnaround story, people get impatient,” said Roberts, a former Marathon Oil Corp. executive who became CEO on June 19, just over a month after a board shakeup that included naming former Suncor CEO Rick George as chairman.
Bolstering its balance sheet and fixing its cost structure by selling assets is “right on the mark,” said Greg Pardy, an analyst at RBC Capital Markets in Toronto. Penn West is being punished because its indebtedness means it can’t afford to pursue investor-friendly share buybacks to counter share dilution, he wrote in a Nov. 7 note to clients. Pardy rates Penn West the equivalent of a hold.
It may take two years for Penn West to pay a sustainable dividend while also boosting oil reserves and output without increasing debt, Gordon Currie, an analyst at Salman Partners Inc. in Calgary who rates Penn West a hold, said in a Nov. 14 interview.
“They’ll come out the other end in good shape but this is a pretty painful transition if you’re a shareholder,” Currie said.
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