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Penn West tightens its belt on lower oil prices

Penn West CEO addresses the company’s AGM in June, 2010. ‘Our focus is on adding light oil and we have the inventory to do just that,’ Mr. Nunns said Thursday.


Long-struggling Penn West Petroleum Ltd. will cut spending and try to lower costs this year by finding efficiencies, halting land acquisitions and taking a close look at its work force as it grapples with the uncertainties of oil differentials facing Western Canadian producers.

One of the largest Canadian-headquartered oil and gas companies, Penn West has joined others in a struggle to get costs down in a North American market where new industry technologies have unlocked previously untapped oil supplies and pipeline space is at a premium.

The company will slow its drilling pace compared with last year and focus efforts on core assets such as the Spearfish play in southern Manitoba. Drilling activity for the first quarter of 2013 will peak at about 20 rigs, the company said, compared with 38 rigs during the same period in 2012. Its aim is to cut production costs by about a quarter.

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Base spending will drop to $900-million this year compared with about $1.7-billion in 2012 – although depending on commodity prices, differentials, efficiencies and portfolio management, the company has left room for optional incremental spending of up to $300-million.

"Give uncertainties, particularly in the oil price differentials, we believe this is a prudent course of action to pursue in the current environment," president and CEO Murray Nunns said in a conference call on Thursday.

"Our focus is on adding light oil and we have the inventory to do just that."

However the Western Canada price differential is just one of Penn West's headaches. In the past 12 months, the Calgary company's stock price has lost almost half its value. It managed to shed $1.3-billion in debt in 2012, but last fall, four senior executives abruptly left in a management shakeup that was seen as an attempt to get a handle on underperforming operations and flagging stock prices.

Beyond finding efficiencies in field operations, Mr. Nunns said the company will closely examine its work force in the next six months. "We're looking at maximizing some efficiencies," he said. "We're looking at a lot of the key functions within the organization to make sure it's at optimal levels for what we're doing."

Dirk Lever of AltaCorp Capital Inc. said that although Penn West is struggling with the same issues every North American producer is facing, it would be in better shape if it had decided to cut its generous dividend – as Bonavista Energy Corp. announced it would do on Thursday.

Although Bonavista's shares fell with the news it would cut its monthly dividend by 42 per cent, most analysts said it was a prudent move.

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"A lot of people were expecting or hoping that Penn West would do the same but Penn West did not cut their dividend, and their payout ratio is one of the higher ones," Mr. Lever said on Thursday.

"If you combine their capital program and their dividend, it exceeds cash flow. This is a company that has a fair amount of debt, which is why the marketplace is saying … we're not rewarding you for the dividend."

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