In June 2015, OTPP signed a large overriding royalty deal with Cenovus that included exposure to the Weyburn Unit. Out of the extensive portfolio of Cenovus assets that was included in the transaction, OTPP singled out Weyburn as key for their interest in signing the royalty deal:

Teacher’s Senior Vice President Ziad Hindo said his group was interested in HRP particularly for the Weyburn property, which is the largest geological CO2 storage project.

Penn West is the second largest working interest holder in Weyburn at 10% ownership, other notable minority holders beside OTPP and OMERS (5% each) are: Arc Resources at 7% and Crescent Point at 3%.

It is unlikely that Penn West will get the same deal as Pengrowth in 2012/2013. Thus, If we were to apply a 30% discount we would get a valuation of $221m (which would put it around the $200m to $250m value estimated by Merrill). Should Penn West succeed in divesting this non-core asset for $220m in Q4, their debt will be reduced by 10% while their production will decline by 2.8% (based on 88K average barrels for 2015.)

It is fascinating that a single non-core asset presenting 2.8% of production can reduce Penn West total debt by 10%, yet the market is trading the stock as they will be filing for BK tomorrow. One must wonder if a single non-core asset presenting 2.8% of production is worth $220m (8.6% of EV) what would be the value of the 54K core barrels (61% of production)?

We have analysts like Merrill placing a 75c ($97CDN) target value for the shares ($2.7B CDN EV) while simultaneously placing $200m to $250m value on 2.8% of their production. By Merrill logic excluding Weyburn the remaining 86K barrels of production (54K of which is a profitable highly coveted core) is worth $2.47B or a mere $28K per flowing barrel. This is an obscene valuation and is totally disconnected from asset valuations even in the current oil price environment. For reference, on July 2^nd CPG acquired 3200 Swan Hills barrels for $81K per flowing barrel. Penn West has 8K in non-core Swan Hill production for sale, if Penn West was to get only 50% of what CPG paid in their Swan Hill transaction or $40K per flowing, this asset would still be worth $320m. Penn West current valuation is clearly insane and seems to be completely driven by fear of a covenant violation. At this stage a violation, and a fire sale liquidation of assets would most likely produce proceeds that are 4 to 5 times higher than the current share price. 

Nawar