Indeed there are quite few similarities between Baytex and Penn West in terms of production, cash flow and debt ratios. I do believe however that Penn West is advantaged in terms of optionality to reduce its debt and is also a more attractive takeover target due to the nature of its asset base. Baytex has a concentrated asset base: 22.4K barrels Peace River, 15.5k barrels Lloydminster and 39.5K Eagle Ford, this concentration is highly limiting in terms of divestures optionality, the company Canadian operation which is mostly heavy oil is currently uneconomic to drill and thus very hard to sale, this leaves them with the non-operated Eagle Ford position which they can’t divest because it is the only asset that is economic to drill in their portfolio today.
Penn West has much better flexibility in terms of asset divestures, Penn West is like energy super market: natural gas in BC, heavy oil and light oil in Alberta (Peace River, Cardium, Swan Hills, Slave Point), light oil in Saskatchewan (Viking, Wayburn), light oil in Manitoba (Waskada/Spearfish) in addition to a host of other minor assets and prospective acreage such as the Duvernay which are spread in few provinces. Some of Penn West assets remain highly covered and highly valued today and some much less so. If we take the Viking for example this asset alone is worth anywhere from $600m to $700m today (exit production at the Viking should be at 8K plus, target was 9K for this year in their December 2014 presentation). If Penn West was to part with the Viking in Q4 at $650m such a deal would reduce their debt to $1.7B while reducing their cash flow and production by less than 10%. (Can someone imagine the impact on the $500m market cap if the company was to divest 7% to 8% of its production for $650m?). Beside the Viking the company has optionality on other non-core assets, but none of them will get top dollar, however unloading a bunch of their non-core assets will make a difference between a BK valuation and ongoing concerns valuation and so even if the divesture metrics are not that attractive. In addition to asset sales, Penn West also has JV optionality for its massive Cardium position (by far the largest in the play). As for a complete transaction, it is much easier to transact a company a Canadian only portfolio than a company like Baytex with a Canadian/US split. The currency advantage by being a Canadian based operator plays to Penn West advantage in the current environment where each dollar makes a sizable impact on annual cash flows. Finally the tax credits the company is sitting on are highly valuable today as the tax rates are raised in Alberta by 12%, CNQ took a $500M+ tax hit in Q2 due to the higher tax, accessing Penn West tax credits would substantially reduce such a hit.
On top of the above from a strategic stand point all of the Canadian majors are heavily invested in heavy oil and oil sands, the economics of this type of production are becoming increasingly challenged due to: long investment cycle in an increasingly volatile energy market without OPEC, high production costs (both for mining and SAGD), higher environmental costs, and limited oil sands transportation options. Canadian tight oil enjoys better economics, better access to market (Line 9B finally coming online late 2015), shorter investment cycle, and lower environmental footprint/cost. Canadian operators will be hard pressed to lighten their production mix, and Penn West has the acreage, the production profile and potential to make a difference to the likes of CNQ, SU and HSE as well as few IOCs with Canadian operations.
I remain very sanguine about the future of Penn West, the oil market is due to move to at least $60 in the next couple of quarters as production declines take hold worldwide and demand continues to increase, even a move to the mid-50s would prove helpful for Canadian asset sales due to the weak Canadian dollar.
Have a great weekend,
Regards,
Nawar
