While no oil company has been spared the pain of the oil market downturn, few have been as deeply impacted as Penn West Petroleum Ltd. (TSX:PWT)(NYSE:PWE). Its stock price is down a devastating 85% over the past year as the plunge in the oil price forced the company to make several really tough decisions.
Last week it announced another round of cuts that were so deep that it looks like the company has thrown in the towel on any semblance of a turnaround plan as it is now clearly just trying to survive.
A gusher of pink slips
One of the largest cuts Penn West made last week was to its workforce. The company announced that it was laying off 35% of its employee base, which is expected to save the company $45 million per year. This isn’t the first time the company has reduced its staffing level as it cut its employee count by 10% in 2013 as one of the initial phases of its turnaround plan in an effort to cut costs.
That turnaround plan, however, hasn’t worked due to the subsequent plunge in crude prices.
Penn West’s job cuts this past week represent one of the largest workforce reductions by an oil company since the downturn started. However, it hasn’t been alone in making cuts as leading U.S. independent oil company ConocoPhillips announced a 10% global workforce reduction last week due to the downturn. However, its Canadian operations took a larger hit as ConocoPhillips axed 15% of its Canadian workforce.
Clearly, the Canadian oil sector has been deeply impacted by the downturn, which is why Penn West has really struggled.
Cutting capex and the dividend
Once of the reasons Penn West is cutting so many jobs is because it is reducing its capex spending and therefore will need less employees to manage its production. This latest cut will bring its 2015 capex budget down to $500 million, which is $75 million lower than its previous budget reduction in July. Further, this budget is a far cry from its original spending plan of $840 million.
The capex cut will have a noticeable impact on the company’s 2015 production. Penn West now expects its production to average 86,000-90,000 barrels of oil equivalent per day, or BOE/d, which is down from a previous estimate of 90,000-100,000 BOE/d.
Moreover, the company is now on pace to deliver a year-over-year decline in production as its 2014 exit rate was 97,143 BOE/d and its average rate for the year was 103,989 BOE/d. While there were some producing assets sold over the past year, Penn West is now one of the few North American oil companies that is on pace to deliver a year-over-year decline in production as many are still growing or aiming to at least keep production flat.
Another clear sign that Penn West is running out of options is that its dividend has now been completely suspended. Once known for its generous dividend, Penn West now joins a number of other high yielders that have been forced to suspend the payout to conserve cash as it was among the many that used too much debt to support the dividend during the boom times.
Investor takeaway
Last week’s trio of steep cuts signal that Penn West is in real trouble and might not make it out of the downturn without either being forced to sell to a deeper-pocketed rival or restructuring through bankruptcy.
The company has clearly thrown in the towel on its turnaround plan as it is no longer planning to grow its way out of its debt problems as it has no choice now but to cut its cash outflows so deeply that it is at the point where its oil and gas production is starting to decline. This is a turnaround story that has been upended by a nightmare scenario.
