Penn West CEO sees big culture shift away from output, toward profitability
CALGARY - The CEO of Penn West Petroleum Ltd. says the company is in the midst of a big cultural shift, focused less on churning out as much oil as possible and more on profitability.
"I lot of people get hung up on barrels," said David Roberts, the former Marathon Oil executive who took the reins of Penn West in June. "Barrels don't matter unless you're making money."
Roberts defended his company's new strategy following a nearly 13 per cent slide in its share price over the past two days. On Tuesday, Penn West announced the sale of $175 million in non-core Alberta properties and an update to its production and cost outlook.
On Wednesday, the stock lost nearly nine per cent, and on Thursday it lost another four, to close at $7.89 on the Toronto Stock Exchange.
"I'm not going to say the market's wrong. I would speculate they overreacted," Roberts told a CIBC investor conference in Whistler, B.C., on Thursday.
Some analysts were underwhelmed by the asset sale, which follows the closing of $486 million in divestitures late last year. As part of a new strategy announced last November, Penn West has said it aims to divest of up to $2 billion in assets by the end of 2014.
"We are encouraged that the company is making traction with additional asset sales, but at the same time this small sale does not really move the needle in terms of improving the company's (debt to cash flow) ratio," said Kristopher Zack of Desjardins Securities, who described the metrics of the deal as "not great."
On a more positive note, Penn West is seeing 25 to 35 per cent cost improvements in its main operating areas.
"Despite the positive strides in terms of cost reductions, more meaningful non-core dispositions are needed to get debt levels down to what we believe will be considered a manageable level for a dividend-paying corporation," wrote Zack.
"We still believe that we are in a buyer's market and, as a result, there is still execution risk in selling assets."
Dundee Capital Markets analyst Brian Kristjansen agreed the price Penn West got for the assets was "low." Although the sale has the benefit of lowering operating costs, it means a reduction in cash flow.
However, Roberts said Thursday: "People tend to focus on the wrong metrics. They looked at this in terms of the cash flow per flowing barrel."
He said the deal means Penn West has now exited a region of Alberta it didn't want to be in and moved 1,800 wells out of its portfolio, improving focus.
"That's a significant metric for a company like ours as we go forward."
Taking into account the dispositions so far, Penn West says its 2014 production is expected at between 101,000 and 106,000 barrels of oil equivalent per day, down from an earlier forecasted range of 105,000 to 110,000. It has also chosen not to restore 3,200 barrels per day in production that had been disrupted in 2013.
"No offence to the past, because it is what it is, but production was king," said Roberts.
"This is a business about making money, not barrels and that's a significant culture shift for this company and I think it's going to continue to bear dividends as we go forward and that's the reason why I don't get too hung up on the short-term production issues."
Some of Penn West's peers, such as Talisman Energy Inc. (TSX:TLM) and Encana Corp. (TSX:ECA), have taken a similar tack in recent months, focusing less on production growth and more on driving down costs.
In addition to replacing its CEO, Penn West has also halved its dividend and cut its workforce to 1,400 from 2,300.
A year from now, Roberts said Penn West will be a better-performing company "that no longer has just barely got its chin out of the water relative to its debt structure."
"It's just going to be a cash machine and I think people are going to be happy with that."
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