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Investors slam Penn West after accounting irregularities revealed

Rick George is the current chairman of Penn West Petroleum Ltd.


Penn West Petroleum Ltd. shares skidded 14 per cent on Wednesday as investors fretted about damage that could stem from accounting irregularities that have forced the oil producer to pore over its books for the past 4-1/2 years.

Penn West, which has been undergoing a restructuring for more than a year, said late on Tuesday that it had notified securities regulators in Canada and the United States about the issues, which include some entries that make expenses appear lower. The company said its historical financial documents for the period under review are not reliable.

"We're trying to figure out, was there an actual intent to deceive or was this just kind of a mistake because of different classifications of where things should have been? With accounting rules there is a lot of flexibility to classify something as an operating cost or a capital cost," said Jeremy McCrea, analyst at AltaCorp Capital Inc.

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"If the intent in putting something on the capital side of things was to purposely increase your funds flow so you would be on side with your debt covenants, that's an issue."

The $4.2-billion producer said its accounting review could force it to cut budget and royalty expense expectations for 2014 and increase its operating cost predictions. This, in turn, would reduce the amount of money the company expects to take in.

The market has been taking a wait-and-see stance with Penn West's turnaround strategy under chief executive David Roberts. The strategy is aimed at cutting costs and focusing capital spending on the company's best projects.

Now, depending on what forensic accountants that Penn West has hired turn up, the company could end up the target of shareholder lawsuits which would add to its woes, Mr. McCrea said. The uncertainty is likely to keep weighing on the stock, despite recently improved operating performance, he said.

He put his rating and target for the company under review, pending further details on the situation.

So far, Penn West's audit committee has identified $70-million in operating expenses that it believes were improperly classified as capital expenditures in the property, plant and equipment category in 2013, it said. Penn West did the same with $111-million in 2012, according to the committee's preliminary findings

The company said restating financial results may result in a violation of the terms tied to its bank debt and other notes.

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Rick George, Penn West's chairman, said in the press release the company acted "quickly and effectively" to review its accounting methods.

That and the speedy referral of its information to the U.S. Securities and Exchange Commission and Alberta Securities Commission suggest that the company is concerned that the irregularities fall beyond judgment calls within accepted grey areas of accounting.

Penn West's second-quarter results may be delayed because of the review.

The negative impact of the accounting revelations overshadowed a strong operational showing in the second quarter, said Travis Wood, analyst with TD Securities Inc.

"Although [second-quarter] production volumes were better than expected, we believe that the improving operations strategy will be overshadowed by the accounting audit and its potential ripple effects across the business," Mr. Wood said in a research note. "Although Penn West appears to be forthcoming in its findings early on, the broader impact on financial operating measures is relatively unclear today."

Penn West did not say which employees are "believed responsible" for the accounting irregularities, but noted they are no longer working for the company. The review arose from information brought to the attention of chief financial officer David Dyck, who started on May 1 and took over from Todd Takeyasu. In an interview late Tuesday, Mr. Takeyasu said the committee's concerns could be a result of different interpretations of accounting methods.

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Penn West's former chairman, Bill Andrew, who is now chairman and CEO of Long Run Exploration Ltd., said he was not in positions to sign off on financial statements during the times in question.

He stepped aside as chief executive in mid-2011 and was not on the board's audit committee while he continued as a director.

Mr. Andrew said companies have some latitude when deciding whether expenses are for operating or capital, such as when nearing the end of operations for drilling a well, for example, and beginning production. The numbers discussed by Penn West in its statement appear high, however, he said.

"There should be, and there was when I was CEO, an internal review process," Mr. Andrew said. "The two parts are how you classify some of the costs, whether it's operating or capital, and those are sometimes grey. The other part of it is, from an end of an operation and flipping it over to the production side and into operations. That's a little bit grey as well."

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