Penn West’s woes: The debt drama by the numbers

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Selling $1-billion worth of assets wasn't enough. Cutting more costs won't be, either. So Penn West Petroleum Ltd. is pleading with its lenders to give it a bit of breathing room.

After signalling the need to rework its debt terms in March, the energy producer added some urgency to the request Monday, stressing that it likely won't meet its revised debt covenants by the end of June. Such restrictions were put in place last May when Penn West's credit facility was also cut by $500-million.

The warning comes despite a dramatic debt restructuring campaign over the past three years, during which the total value of Penn West's long-term debt dropped to $1.9-billion from $3.4-billion. The company has also cut operating costs on its remaining assets by 20 per cent since 2013, and expects to be able to slash another 20 per cent on the same assets.

But the implicit message now is that isn't enough, which is why the company needs to rework its covenants.

For anyone who hasn't followed the downward spiral closely, it can be difficult to appreciate the financial difficulties the company faces. To help with that, here's a breakdown of what Penn West agreed to a year ago.

Chiefly, its debt ratios are supposed to be in better shape by the end of this year. As part of the deal last May, the company's total debt can't equal more than five times its earnings before interest, taxes, depreciation and amortization (EBITDA) by June 30. That ratio currently sits at 4.4 times, and the company has warned about weaker cash flows.

Penn West also agreed to drop its debt ratio to 4.5 times by Sept. 30 and to four times by Dec. 31. It only gets harder from here.

And until its debt is in order, Penn West can't raise its dividend above 1 cent per share, after pledging not to increase it beyond that until its senior debt amounts to less than three times its EBITDA for two consecutive quarters. (At the moment, Penn West doesn't pay a dividend.)

The oil producer also promised to put net proceeds from its asset sales to repay $650-million of debt outstanding with note holders at par. Debt reduction, then, is the absolute priority – which makes sense because its weighted average interest rate on its existing notes is 7.6 per cent.

To give its lenders some reassurance on this front, chief executive officer David Roberts promised on a conference call Monday that fixing the balance sheet remains the company's "top priority for 2016."

As of March 31, $1.4-billion of the the company's senior debt is held by note holders, while $500-million is owed to banks through Penn West's credit facility. This facility has $686-million of unused credit available, should Penn West need to use it.

Penn West's next debt maturity comes later this month, when a $118-million (U.S.) note must be paid back. On Monday, the company said "we have more than adequate liquidity" to repay the funds.

After all of its asset sales, Penn West is focused on two specific areas of the energy patch: the Cardium and the Viking formations in Alberta and Saskatchewan. The company produced 48,500 barrels of energy equivalent from assets in these regions during the first quarter.