Penn West Petroleum Ltd. needs to further clean up its balance sheet if it wants to get off investors' no-go list. The company has made strides, largely by selling assets, and if it hits its new debt target, the market may forgive its previous financial sins. But the long-term plan largely relies on selling more of its property – a proposition that could be tricky as the respective prices of oil and gas continue to tumble.
The company aims to lower its debt-to-cash flow ratio to between 1 and 1.5 times some time in 2016. In other words, if the ratio hits 1.5, Penn West expects to hold $1.50 in debt for every $1 in cash flow it rakes in. Penn West predicts its 2015 ratio will clock in at 2.7, compared with an earlier estimate of 1.7. The adjustment, Penn West said, is owing to its choice to be patient as it tries to sell assets in the Duvernay.
Cash flow helps pay interest on debt, and to ultimately repay loans. If the debt burden is too high, it can suck up all the cash flow and leave little or nothing for profit. An unfriendly ratio can also put pressure on a company's ability to pay dividends.
Penn West sold about $1.05-billion in assets which produce oil and gas since it rolled out its turnaround strategy a year ago, defying naysayers. Now it has to sell assets that do not produce hydrocarbons to keep the debt-to-cash flow plan on track.
In an updated long-term plan released Monday, Penn West singled out the Duvernay as an area where it would like to sell assets.
The Duvernay's potential has plenty of market players excited, which is why Penn West hopes to cash in on a sale. But other companies have the same idea. Prospective buyers have a plethora of options in the region, which drives down prospective asset-sale prices – Athabasca Oil Corp. has spent two years looking for a joint venture partner for its Duvernay play. But Chevron Corp, a big player in the Duvernay, sold part of its holdings in October to Kuwait Petroleum Corp. for $1.5-billion (U.S.), giving hope to companies such as Penn West looking to lighten their load there.
The Duvernay's commercial viability is still uncertain, and it is expensive and technically challenging to operate in the area. Penn West, however, expects to have a well pumping by the end of the year to support its sales process, said Greg Moffatt, Penn West's manager of public affairs.
It is encouraging that Penn West has a plan that includes both growth and asset sales, said Laura Lau, a senior vice-president and portfolio manager at Toronto's Brompton Funds. But challenges remain.
"All the pieces have to fall in place," she said. "It is definitely harder now with lower commodity prices – there's no doubt about it."
The new plan assumes Penn West will collect about $500-million by selling assets by January 1, 2016. If it sells assets more quickly, it should be able to hit its debt-to-cash flow target earlier than its current projections.
"We remain committed to reaching the long-term target of 1 to 1.5 times net debt to funds flow and have a clear line of sight to getting there, largely through non-core, non-producing asset sales and increasing funds flow through delivery of growth in higher net back oil volumes and further decreasing our cash costs," David Dyck, Penn West's chief financial officer, said during a conference call Monday according to a transcript published by Thomson Reuters.
With files from Tim Kiladze