Penn West Petroleum Ltd. is overhauling its finances, chopping jobs and bringing in new leadership, joining a growing list of Canadian energy companies that are rewriting their strategies in an effort to boost flagging returns.
The moves show oil veteran Rick George is taking big steps to revitalize the debt-laden company just a month after he took over as Penn West’s chairman, joined by vice-chairman Allan Markin, another industry heavyweight. In addition to naming a new CEO, Penn West cut its dividend, detailed layoff plans for about 200 employees, and launched a strategic review, suggesting it is examining whether to sell assets, find partners or sell itself outright.
Penn West’s new approach comes as energy firms across the board grapple with the discount applied to Canadian crude prices due to transportation constraints, and struggle to keep costs down and show solid returns on development projects. As such factors restrain profits, some of Canada’s most recognizable names are adjusting their plans in order to improve their fortunes.
“It has just been a perfect storm,” said Laura Lau, a senior vice-president at Brompton Funds in Toronto. “When the market is going straight up, you don’t really have to change that much. But when things are flat or going down, then you have to take a look at your cost structure and you have to think about how you run your business.”
Penn West has struggled to keep costs under control and proceed with development plans. It shook up management in November, with four senior executives leaving the company. It also put $1.3-billion worth of assets on the auction block in order to help address its debt, which stood at about $3 billion as of March 31. But these measures were not enough to satisfy investors. Penn West’s stock has been a dud over the years, trading at about a quarter of its level of early 2006. Shares fell to $10.45 at Wednesday’s close, down 4 per cent on the day in the wake of the news.
Now Penn West is replacing Murray Nunns, its chief executive officer, with David Roberts, the former chief operating officer and executive vice-president of Marathon Oil Corp., on June 19.
The Calgary-based company also cut its dividend to 14 cents a share from 27, and said it intends to reduce staff by 10 per cent while searching for other ways to save cash.
The board will also form a special committee to consider “all alternatives to increase shareholder value, including strategic financing alternatives, asset divestments, joint ventures and/or other business combinations,” Penn West said in its statement. It expects to wrap up this process by the end of the year.
Penn West holds one of the largest swaths of land in Western Canada, including a joint venture oil sands project with China Investment Corp. and a natural gas shale project it shares with Japan’s Mitsubishi Corp.
“We will be looking for a huge step change in both where capital is spent as well as the efficiency of each dollar invested,” said Mr. George, Penn West’s chairman and the former CEO of Suncor Energy Inc.
Some of Canada’s most recognizable energy companies are in the midst of rearranging their strategies, highlighting how difficult the oil and gas game has become. Suncor Energy Inc., Encana Corp. and Talisman Energy Inc., for example, are all rewriting their playbooks.
“With turnarounds, things take a long time and they don’t always work,” said Brompton Funds’ Ms. Lau. Indeed, Talisman is overhauling its strategy after its last attempt at reviving the company failed.
The changes come one month after Penn West named two industry stalwarts to powerful board positions. Mr. George, who led oil sands giant Suncor for 20 years, arrived alongside Mr. Markin, the former long-time chairman of Canadian Natural Resources Ltd.
Neither Mr. George nor Mr. Nunns returned calls and e-mails seeking comment. Because Mr. Roberts will not join Penn West until later this month, he will need “a period of familiarization before he will be prepared” for an interview, company spokesman Clayton Paradis said in an e-mail.