Penn West Still Shaky After Cutting Distribution

Jan.22.09 | About: Penn West (PWE)

As promised, I dug a little into Penn West Energy (NYSE:PWE) after the company cut its distribution. Keep in mind that PWE’s numbers are basically an unknown moving target after the huge drop in oil prices. The earnings call on Feb 19 should shed much more light on where the company stands in this tumult.

Using the company’s Q3 sensitivity estimate on the company’s recent guidance of 176.6k BOE/day (58% liquids/42% gas) and prices of US$35 oil and $5 nat gas, I get pro forma funds flow from operations (FFO) of $1.7B.

However, I don’t trust this number. I would surmise that the sensitivity estimate probably breaks down as prices near the cost of production. While I am not privy to any information regarding the company’s cost-cutting measures, it may be instructive to look at the PWE’s costs during Q3 as a guide (all figures CAD$ per BOE):

  • Operating expenses: $12.49
  • Transport costs: $0.49
  • Financing expense: $2.91
  • Stock compensation: $0.66
  • Net G&A: $1.68
  • DD&A: $23.12
  • TOTAL COST PER BOE: $41.35

Of course, some of these costs are non-cash and a few could probably be managed lower, but it does give some indication of where the price floor may be for PWE to sustain profitability. Using my own ad hoc cash flow projections and the same price rack as above, 2009 FFO may come close $1B, if we’re lucky. Personally, I take a skeptical approach toward my investments so I wouldn’t be surprised if 2009 FFO came in anywhere from $600M (netback margin: 20%) on the high end to a cash outflow (negative FFO).

That’s a wide range, but markets are moving so fast, it’s difficult to extrapolate these figures with any confidence over such a wide price drop. Unless management is a lot more savvy than I credit them, I would use the following best, middle and bad-case scenarios if prices stay near these levels:

  • $1.7B FFO best-case
  • $600M FFO middle
  • 0 to negative FFO bad-case (I’d guess there is some chance of seeing this).

The company’s recent guidance led investors to expect $600M - $825M in capex for 2009. Also, its current distribution of $0.23 on 390M units implies $1B in payouts for the year. Finally, PWE is carrying $2.5B on a credit facility that expires in Jan 2011, with annual interest expense on all debt outstanding running around $200M.

Those are some daunting numbers and I am bracing for further distribution cuts if energy prices don’t recover strongly. Nevertheless, I am content to hold my shares for now until I hear what management has to say next month.

Once again, these are very rough projections on my part and I eagerly await the upcoming earnings call for more color. This exercise was simply my attempt to gain some sense of where unitholders might stand in light of the company’s recent announcement.

Disclosure: Long PWE.