Penn West Seen Out of Woods for 2016 After Teine Deal Cuts Debt

  • Stock jumps most since 1992 as debt covenant breach risk eases
  • Penn West upgraded to buy from sell at Raymond James on news

Penn West Petroleum Ltd. is getting a new lease on life, and investors welcomed the news with the biggest stock rally since 1992.

Shares of the Calgary-based energy producer jumped as much as 64 percent on Monday after Teine Energy Ltd.’s agreement to buy oil-producing properties in Saskatchewan for C$975 million ($762 million) in cash eased debt concerns. The stock, up 41 percent at C$1.63 as of 2:22 p.m. in Toronto, is still worth a fraction of its peak price of more than C$47 in 2006 as its elevated debt was made worse by an industry downturn.

“They’ve made it off the Titanic onto a boat,” Rafi Tahmazian, a fund manager at Canoe Financial LP in Calgary, said in a phone interview. Long-term survival depends on oil prices staying high enough for the company to be profitable and how next year’s spring bank line review goes, he said. “What you have driving against them is that they have had to -- going from darling to very troubled -- dispose of extremely good assets.”

Penn West, a consolidator of oil properties in Western Canada a decade ago, has spent the last two-and-a-half years selling assets to bring down debt and make it through a market rout. The company had long avoided parting with the Saskatchewan properties seen as crown jewel assets important to its strategy. However, analysts in recent weeks had forecast that Penn West would have to resort to disposing of them and earlier this month the company was said to have hired Royal Bank of Canada to advise it on a sales process.

Saskatchewan Properties

In the deal announced Friday, Teine, the energy company backed by Canada Pension Plan Investment Board, will buy all of Penn West’s properties in Saskatchewan, including its Dodsland Viking light-oil assets in the east and the medium and heavy crude assets in the west. Penn West now expects to stay within credit covenants through 2016 with the deal, which reduces its debt by more than half, executives said on Monday. The company had previously forecast potentially breaching the covenants in the second quarter.

“The sale is a definitive step which will help to change the narrative from constant discussions around its debt toward constructive conversations around Penn West’s recent performance in its remaining Cardium area,” Jeremy McCrea, an analyst at Raymond James Ltd. in Calgary, wrote in a note. He upgraded his stock recommendation to the equivalent of a buy from a sell. “The Penn West that ends 2016 will be very different than the Penn West that entered 2016.”

Attractive Price

Penn West got an attractive price for the properties, reflecting closely held Teine’s ability to pay up, Kristopher Zack, an analyst at Desjardins Capital Markets in Calgary, wrote in a note. Teine is paying about 15 times the debt-adjusted cash flow of the assets, compared with recent transactions of about 7 times, Zack said.

“In our view, this reflects the deep pockets and long-duration strategy of the CPPIB, Teine’s largest shareholder -- a luxury that, quite frankly, would not be available to most publicly listed producers,” Zack said.

Penn West will now target growing its Cardium and Viking positions in Alberta and plans to sell another C$100 million to C$200 million of mostly gas-producing assets outside its primary areas of focus by the end of the year to reduce expenses further, executives said. The company expects to start growing production again in 2017 by about 10 percent a year well into next decade, said Dave Roberts, chief executive officer of Penn West.

‘Value Proposition’

“By taking control, I believe that Penn West is now a very compelling value proposition for investors,” Roberts said on a conference call.

Penn West is among producers that have been challenged by credit concerns that aren’t going away for the industry with U.S. crude below $50 a barrel, Tahmazian said, pointing to bank line reductions announced in recent days by Paramount Resources Ltd. and Journey Energy Inc. Penn West’s challenge will be to increase production without the highly prized assets it’s chosen to sell in the market rout, he said.

RBC advised Penn West on the deal, while JPMorgan Chase & Co. advised Teine and Canadian Imperial Bank of Commerce advised Canada Pension Plan Investment Board.

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