From all the CCs I have listened to, it seems to me the CEO is not that much of a gambler, but rather he had the illusion that he was running a big diversified oil company . I can understand where the illusion is coming from: his background is from a big oil company, and PWE has all these millions of acres of resources -- alas, resources that only have value if oil sells above $70, perhaps well above. This may explain the lack of hedging. "we are price takers" he said with pride in the Q4 CC. This is what the Exxon CEO is fond of saying ... And then we hear about all this cost cutting and how costs are the best in this area or that area. But none of this is reflected in the cash flow, and cap ex remains disturbingly huge for apparently not much (if any) gain in output.
Kyrosl, I don't agree that the CEO does not understand his company, this is a classic quarterback coach statement. I think the business plan that he proposed and implemented for Penn West made tremendous sense in an $80+ oil enviroment and the results were evident in their 2014 cash flow numbers. As for lack of production growth, the company has been selling assets, shutting down unprofitable production yet they have delivered on their production guidance for 2013, 2014 and are in line with their 2015 guidance. Their business plan (prior to the crash) clearly stated that production would bottom in Q2/2015 before steadily rising into 2019 (of course those numbers don't apply anymore). I think the CEO is taking lots of heat for the 18 months he managed the company prior to the oil crash, yet problems pertaining to high debt and incoherent asset base dates back way back before Dave Roberts came to the helm. I have highlighted before an accelerated asset sales schedule would have been preferable, however hindsight is 20/20, I believe issues pertaining to debt maturity and market conditions may have discouraged him from dumping assets at an aggressive rate.
In another conference he talked about how he is trying to educate the employees so that they think in terms of profits -- as opposed to just getting a paycheck, I guess. This was right around the first low in oil prices. That's how Exxon would attempt to adapt their workforce to new much worse conditions: there's plenty of time, so no need for unpleasant urgency; after all, the balance sheet is rock solid, and we are naturally hedged.
I can't see how the CEO can be faulted for pushing employees to focus on profits! As for lack of urgency, the guy sold $400m in assets during the brief two months window when prices rebounded to the high $50s, renegotiated the covenants, further downsized the work force, substantially cut capex and focused drilling on their top assets. I think plenty was done in extremely challenging and fast changing conditions.
I have replaced my PWE with Jan 16 options, so it's a much smaller % of the portfolio and is now truly an option on oil price over the next few months. If oil does not move meaningfully higher by December or so, my options go to zero, and. IMO, so does PWE.
I think all those comparing PWE to an option with a binary outcome don't understand the optionality this company has, this false option perception is caused due to the asymmetry of information between debt and assets. The debt is a clear hard number that people focus on, but the assets are much less understood and only truly appreciated by a smaller circle of insiders and industry participants with a specific focus on Canadian oil/tight oil plays. This asymmetry is leading to the false conclusion that the assets are worth less than the debt, while the reality is that the assets are worth substantially more than the debt, this is why PWE wont go bankrupt, it may not go to $10 (or even $5 if you are bearish on oil), but it will eventually settle at a valuation much higher than where it stands today.
Regards,
Nawar
