CALGARY, Nov. 2, 2016 /CNW/ - PENN WEST PETROLEUM LTD.
(TSX – PWT; NYSE – PWE) ("Penn West", the "Company",
"we", "us" or "our") is pleased to announce
its financial and operational results for the third quarter ended
September 30, 2016. All figures are
in Canadian dollars unless otherwise stated.
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Three months ended
September 30
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Nine months ended
September 30
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2016
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2015
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% change
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2016
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2015
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% change
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Financial
(millions, except per share amounts)
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Gross revenues
(1,2)
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$
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136
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$
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295
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(54)
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$
|
576
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$
|
995
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(42)
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Funds flow from
operations (2)
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|
32
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|
48
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(33)
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134
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210
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(36)
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Basic per share
(2)
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0.06
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0.10
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(40)
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0.27
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0.42
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(36)
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Diluted per share
(2)
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0.06
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0.10
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(40)
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0.27
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0.42
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(36)
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Net loss
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(232)
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(764)
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(70)
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(464)
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(1,040)
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(55)
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Basic per
share
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(0.46)
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(1.52)
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(70)
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(0.92)
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(2.07)
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(56)
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Diluted per
share
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(0.46)
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(1.52)
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(70)
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(0.92)
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(2.07)
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(56)
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Capital expenditures
(3)
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13
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116
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(89)
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32
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|
371
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(91)
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Net Debt
(4)
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$
|
484
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$
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2,414
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(80)
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$
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484
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$
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2,414
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(80)
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Operations
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Daily
production
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Light oil and NGL
(bbls/d)
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17,644
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44,170
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(60)
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29,502
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49,267
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(40)
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Heavy oil
(bbls/d)
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5,711
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11,153
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(49)
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9,844
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11,992
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(18)
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Natural gas
(mmcf/d)
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107
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161
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(34)
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127
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169
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(25)
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Total production
(boe/d) (5)
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41,233
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82,198
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(50)
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60,533
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89,376
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(32)
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Average sales
price
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Light oil and NGL
(per bbl)
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$
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47.01
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$
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48.28
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(3)
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$
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42.20
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$
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50.91
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(17)
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Heavy oil (per
bbl)
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21.67
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31.20
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(31)
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20.12
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35.91
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(44)
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Natural gas (per
mcf)
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$
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2.46
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$
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2.99
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(18)
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$
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1.92
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$
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2.95
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(35)
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Netback per boe
(5)
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Sales
price
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$
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29.50
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$
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36.05
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(18)
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$
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27.86
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$
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38.45
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(28)
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Risk management
gain
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5.58
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2.83
|
97
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5.19
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1.91
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>100
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Net sales
price
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35.08
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38.88
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(10)
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33.05
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40.36
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(18)
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Royalties
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(1.63)
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(2.72)
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(40)
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(1.04)
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(3.95)
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(74)
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Operating expenses
(6)
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(13.40)
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(20.45)
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(34)
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(12.99)
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(19.02)
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(32)
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Transportation
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(1.71)
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(1.55)
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10
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(1.74)
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(1.43)
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22
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Netback
(2)
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$
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18.34
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$
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14.16
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30
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$
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17.28
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$
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15.96
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8
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(1)
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Includes
realized gains and losses on commodity contracts and excludes gains
and losses on foreign exchange hedges.
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(2)
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The terms "gross
revenues", "funds flow from operations" and their applicable per
share amounts, and "netback" are non-GAAP measures. Please refer to
the "Calculation of Funds Flow from Operations" in the attached
Management Discussion and Analysis and "Non-GAAP Measures" sections
below.
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(3)
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Capital
expenditures include costs related to Property, Plant and Equipment
and Exploration and Evaluation. Includes the effect of capital
carried by partners.
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(4)
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Net debt
includes long-term debt and includes the effects of working capital
and all cash held or cash offered for prepayment to
lenders.
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(5)
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Please refer to
the "Oil and Gas Information Advisory" section below for
information regarding the term "boe".
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(6)
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Includes the
effect of carried operating expenses from its partner under the
Peace River Oil Partnership of $4 million or $1.04 per boe (2015 –
$3 million or $0.44 per boe) for the three months ended and $11
million or $0.66 per boe (2015 – $9 million or $0.39 per boe) for
the nine months ended on a combined basis.
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(7)
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Certain
comparative figures have been reclassified to correspond with
current period presentation.
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President's Message
I am excited and humbled to be joining Penn West to lead the
Company on the next stage of its journey. Through the hard work by
my predecessor Dave Roberts and all
of our employees, we were able to maneuver through a tremendously
challenging time and come out the other side leaner, stronger, and
much more competitive.
Over the coming months, we will reinforce the vision of Penn
West as a premier oil producer. We have the discipline, drive, and
ample financial flexibility to take the Company forward. The third
quarter results mark an inflection point for Penn West. We
delivered above expectations on volumes, continued our trend of
cost management, restarted our development capital, and made steady
progress on the final phases of getting the balance sheet
right.
You will see us change the dialogue of the Company. With
top tier assets in the Cardium, Viking, and Peace
River, the Company will paint a picture and deliver on the
promise of the core assets in the portfolio. These are
extraordinary times. The best is yet to come.
Third Quarter Financial and Operational Highlights
Delivering on Expectations for Production and Costs
- Production averaged 41,233 boe per day, ahead of expectations,
primarily due to continued high reliability of our base production.
Production in our core areas averaged approximately 21,911 boe per
day.
- Operating costs per boe, net of carry, were $13.40 due to a continued focus on cost controls.
Wet weather also caused delays in certain discretionary expenses,
including turnarounds and workovers, into the fourth quarter.
- Funds flow from operations of $32
million ($0.06 per share) was
supported by strong production volumes and lower-than-expected
operating costs.
Back to Work in the Field
- Capital expenditures were $13
million during the third quarter of 2016 as we restarted
field operations with a four rig program. During the quarter, we
drilled two wells in the Cardium, 11 wells in the Alberta Viking,
and two gross wells in the Peace
River area. Our second half development plan remains on time
and on budget and is expected to increase our exit volumes by
approximately 3,000 boe per day.
Further Steps in Strengthening the Balance Sheet
- We closed several asset dispositions for total proceeds of
approximately $75 million and
associated production of approximately 6,000 boe per day. The
Company remains on track to generate total disposition proceeds in
the second half of the year between $100
million and $200 million, inclusive of the sales closed in
the third quarter.
- As a result of the asset dispositions closed in the third
quarter, with associated production of approximately 6,000 boe per
day, and additional dispositions anticipated in the fourth quarter,
we are adjusting our full year 2016 production guidance to 52,000 –
55,000 boe per day from 55,000 – 57,000 boe per day. We are
maintaining annual production guidance in our Core Areas at 22,000
– 24,000 boe per day. Our full year 2016 capital budget remains
unchanged at $90 million, plus
$15 million allocated for
decommissioning expenditures. Full year guidance is unchanged for
both operating costs at $13.50 –
$14.50 per boe and for G&A costs
at $2.50 – $2.90.
- In September 2016, we offered
$448 million of net proceeds received
from dispositions during the year for prepayment of outstanding
senior notes. The note holders accepted $437
million which was subsequently prepaid in October 2016. The remaining $11 million was used to repay indebtedness on our
syndicated bank facility. This prepayment reduced the outstanding
principal on our senior notes to approximately $139 million, lowered the average interest rate
on our debt, and reduced the number of noteholders from 36 down to
two.
- As at September 30, 2016, Net
Debt was $484 million which included
the reduction in long-term debt from the pre-payment completed in
October 2016. Additionally, we were
in compliance with all of our financial covenants under our lending
agreements with Senior Debt to EBITDA of 1.95 times, relative to a
4.5 times limit.
- In 2016, we recorded a non-cash charge totaling $108 million (2015 – nil) on certain office lease
commitments. We will require less office space in the future as we
have limited the size and scope of our operations this year.
Select Metrics in Core Areas
The table below outlines select metrics in our core areas for
the three and nine months ended September
30, 2016 and excludes the impact of hedging:
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Area
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Select Metrics –
Three Months Ended September 30, 2016
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Production
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Liquids
Weighting
|
Operating
Cost
|
Netback
|
Cardium
|
16,168
boe/d
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63%
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$11.00/boe
|
$23.00/boe
|
Alberta
Viking
|
827 boe/d
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34%
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$14.00/boe
|
$6.50/boe
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Peace
River(1)
|
4,916
boe/d
|
98%
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$1.00/boe
|
$18.50/boe
|
Total
Core
|
21,911
boe/d
|
70%
|
$9.00/boe
|
$21.00/boe
|
|
|
Area
|
Select Metrics –
Nine Months Ended September 30, 2016
|
Production
|
Liquids
Weighting
|
Operating
Cost
|
Netback
|
Cardium
|
17,706
boe/d
|
66%
|
$9.50/boe
|
$23.50/boe
|
Alberta
Viking
|
1,004
boe/d
|
38%
|
$11.50/boe
|
$5.50/boe
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Peace
River(1)
|
5,085
boe/d
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98%
|
$1.00/boe
|
$15.00/boe
|
Total
Core
|
23,795
boe/d
|
72%
|
$8.00/boe
|
$21.00/boe
|
(1)
Net of carried operating costs
|
Operated Development Activity
Our renewed financial flexibility allowed us to
restart drilling and completions operations in the third quarter.
The Company increased its capital budget by approximately
$40 million in the second half to
accelerate development in the Cardium and Alberta Viking. The
Company initiated a four rig drilling program: one rig in the
Alberta Viking, one rig in the Cardium, and two rigs previously
planned in the Peace River
area.
The table below provides a summary of our operated activity
during the third quarter:
|
|
|
Number of
Wells
|
|
Drilled
|
Completed
|
On
production
|
|
Gross
|
Net
|
Gross
|
Net
|
Gross
|
Net
|
Cardium
|
2.0
|
2.0
|
0.0
|
0.0
|
0.0
|
0.0
|
Alberta
Viking
|
11.0
|
11.0
|
0.0
|
0.0
|
0.0
|
0.0
|
Peace
River
|
2.0
|
1.1
|
2.0
|
1.1
|
2.0
|
1.1
|
Total
Core
|
15.0
|
14.1
|
2.0
|
1.1
|
2.0
|
1.1
|
Cardium
In the J-Lease area of Pembina, we successfully drilled our two
well program in late September. Both wells have now been fracture
stimulated using a cemented liner system and will be brought on
production shortly. We also focused on waterflood optimization and
reservoir surveillance to optimize injection targets in key Cardium
areas. We converted one horizontal production well to a water
injection well during the quarter to provide pressure support to
the surrounding area.
In the Crimson area of Willesden Green, we drilled the first of
our three well development program in early October. We expect to
finish drilling and complete the wells in late November. During the
quarter, we initiated work on upgrading some waterflood
infrastructure in the area to provide support to the existing
horizontal producers.
Alberta Viking
In the third quarter, the Company engaged a drilling rig on an
11 well development program in the Alberta Viking in Esther.
Drilling was finished ahead of schedule and per well drilling costs
are trending approximately $50
thousand below budget. The wells were all drilled with one
mile laterals and will be completed with a cemented liner system
and an average of 36 stages per well. Completions will commence in
early November and we expect to have the wells on production in
early December.
Peace River
During the third quarter, we initiated a two rig development
program in Peace River. We drilled
and brought on production two wells (1.1 net) of our 19 well second
half development program. Both wells are currently producing above
type curve. Despite initial wet weather delays in restarting
drilling, we remain on track to complete the program by the end of
the year. We continue to have approximately 90 percent of our
working interest expenditures paid by our joint venture
partner.
We previously announced a multi-year gas supply agreement in
support of a proposed power plant in the Peace River area. The power plant project is
proceeding forward with the design of pipeline and facilities for
all four major project areas which will utilize the power plant,
with construction of the Harmon Valley South gathering system
commencing the first week of November. Start up and commissioning
of the power plant is expected in December of 2017, at which time
our agreement will allow us to meet associated gas conservation
targets and significantly reduce our environmental impact in this
area.
Senior Secured Debt
In the third quarter, we closed dispositions for total proceeds
of approximately $75 million.
Year-to-date we have generated approximately $1.4 billion in asset disposition proceeds. As a
result, our third quarter net debt was approximately $484 million, down from $2.1 billion at year-end 2015; which is outlined
as follows:
|
|
|
(millions)
|
As
at
September 30,
2016
|
As
at
December 31,
2015
|
Syndicated bank
facility and senior notes
|
$912
|
$1,940
|
Cash
|
($448)
|
($2)
|
Working capital
deficiency (1)
|
$20
|
$182
|
Net debt
|
$484
|
$2,120
|
(1)
Includes Accounts receivable, Other current assets, Accounts
payable and accrued liabilities and excludes cash offered for
prepayment.
|
During the quarter, we offered $448
million of cash on hand from asset dispositions to our
senior noteholders to prepay amounts owing to them at par and on a
pro rata basis. Subsequent to the quarter, our noteholders agreed
to accept $437 million of the
prepayment offer with the remainder of the cash applied to our bank
debt. This prepayment lowered the outstanding principal on our
senior notes to approximately $139
million, lowered the effective interest rate on our debt,
and reduced the number of noteholders from 36 down to two.
On September 30, our Senior Debt
to EBITDA was 1.95 times relative to a 4.5 times covenant
threshold, which marks a meaningful step down in leverage. Going
forward, we expect to remain in full compliance with all of our
financial covenants.
The table below outlines the calculation of our Senior Debt to
EBITDA covenant as at the end of the third quarter:
|
|
(millions, except
ratios)
|
Trailing
Twelve
months
ended
September 30,
2016
|
|
|
Cash flow from
operating activities
|
$(66)
|
Change in non-cash
working capital
|
$72
|
Decommissioning
expenditures
|
$16
|
Financing
|
$145
|
Realized gain on
foreign exchange hedges on prepayments
|
$(18)
|
Realized foreign
exchange loss on debt prepayments
|
$177
|
Restructuring
expenses – cash portion
|
$20
|
EBITDA
|
$346
|
EBITDA contribution
from assets sold (1)
|
$(105)
|
EBITDA as defined
by debt covenants
|
$241
|
|
|
Total senior
notes
|
$576
|
Syndicated bank
facility advances
|
$336
|
Total long-term
debt
|
$912
|
Repayment from
disposition proceeds (2)
|
$(448)
|
Letters of credit –
financial (3)
|
$5
|
Total senior
debt
|
$469
|
|
|
Senior Debt to
EBITDA
|
1.95x
|
|
|
(1)
|
Consists of EBITDA
contributions from assets that have been disposed in the prior 12
months.
|
(2)
|
Was offered to
noteholders prior to September 30, 2016 and repaid in October
2016.
|
(3)
|
Letters of credit
that are classified as financial are included in the Senior Debt
calculation per the debt agreements.
|
Updated Hedging Position
Our hedging program helps reduce the volatility of our funds
flow from operations, and thereby improves our ability to align
capital programs going forward. We target having hedges in place
for approximately 25 percent to 40 percent of our crude oil
exposure, net of royalties, and 40 percent to 50 percent of our gas
exposure, net of royalties.
Our positions as of November 2,
2016 are as follows:
|
|
|
|
|
|
|
|
Q4
2016
|
Q1
2017
|
Q2
2017
|
Q3
2017
|
Q4
2017
|
2018
|
Oil Volume
(bbl/d)
|
8,000
|
6,800
|
3,800
|
3,800
|
3,800
|
-
|
C$ WTI Price
(C$/bbl)
|
$69.27
|
$67.65
|
$66.30
|
$66.30
|
$66.30
|
-
|
US$ WTI Price
(US$/bbl) (1)
|
US$51.88
|
US$50.51
|
US$49.54
|
US$49.58
|
US$49.72
|
-
|
Gas Volume
(mmcf/d)
|
19
|
17
|
15
|
13
|
11
|
4
|
AECO Price
(C$/mcf)
|
$2.96
|
$3.02
|
$2.73
|
$2.74
|
$2.99
|
$2.89
|
|
|
|
|
|
|
|
(1) US$ price implied
foreign exchange rates as at October 31, 2016
|
Updated 2016 Guidance
As a result of the asset dispositions closed in the third
quarter, with associated production of approximately 6,000 boe per
day, and additional dispositions anticipated in the fourth quarter,
we are adjusting our full year 2016 production guidance to 52,000 –
55,000 boe per day from 55,000 – 57,000 boe per day. In our Core
Areas, full year 2016 production guidance is unchanged at 22,000 –
24,000 boe per day.
Our full year 2016 capital budget remains unchanged at
$90 million, plus $15 million allocated for decommissioning
expenditures.
Full year corporate operating costs and G&A cost guidance is
unchanged at $13.50 – $14.50 per boe and $2.50 – $2.90 per
boe, respectively.
Our guidance for full year 2016 is as follows:
|
|
|
Metric
|
|
Guidance
Range
|
Average Corporate
Production
|
boe/d
|
52,000 – 55,000
|
Average Core Area
Production
|
boe/d
|
22,000 –
24,000
|
|
|
|
E&D Capital
Expenditures
|
$
millions
|
$90
|
Decommissioning
Expenditures
|
$
millions
|
$15
|
|
|
|
Corporate Operating
Costs (1)
|
$/boe
|
$13.50 –
$14.50
|
G&A
Costs
|
$/boe
|
$2.50 –
$2.90
|
(1)
Net of carried expenses in Peace River
|
We are in the process of finalizing our 2017 budget. We still
anticipate spending up to $150
million in total capital, including decommissioning
expenditures, next year. The Cardium will remain the foundation of
our development program supported by incremental growth in the
Alberta Viking and meaningful cash generation at Peace River. We expect next year's
program will deliver core production growth of at least 10% from
the end of 2016 to the end of 2017 and will be fully paid for by
funds flow from operations. We expect to formalize these plans and
update the market in the coming months.
Conference Call Details
A conference call will be held to discuss the matters noted
above at 9:00 am Mountain Time
(11:00 am Eastern Time) on
Wednesday, November 2, 2016.
To listen to the conference call, please call 647-427-7450 or
1-888-231-8191 (toll-free). This call will be broadcast live on the
Internet and may be accessed directly at the following URL:
http://event.on24.com/r.htm?e=1281273&s=1&k=28EA646FAFFFE0BE427BB3122083F436
Additional Reader Advisories
Oil and Gas Information Advisory
Barrels of oil equivalent ("boe") may be misleading,
particularly if used in isolation. A boe conversion ratio of six
thousand cubic feet of natural gas to one barrel of crude oil is
based on an energy equivalency conversion method primarily
applicable at the burner tip and does not represent a value
equivalency at the wellhead. Given that the value ratio based on
the current price of crude oil as compared to natural gas is
significantly different from the energy equivalency conversion
ratio of 6:1, utilizing a conversion on a 6:1 basis is misleading
as an indication of value.
Non-GAAP Measures
This news release includes non-GAAP measures not defined under
International Financial Reporting Standards ("IFRS")
including funds flow from operations, funds flow from
operations per share-basic, funds flow from operations per
share-diluted, netback, EBITDA and gross revenues. Such terms are
explained under the heading "Non-GAAP Measures" in the attached
Management's Discussion and Analysis. Non-GAAP measures do not have
any standardized meaning prescribed by GAAP and therefore may not
be comparable to similar measures presented by other issuers.
Forward-Looking Statements
Certain statements contained in this press release constitute
forward-looking statements or information (collectively
"forward-looking statements") within the meaning of the
"safe harbour" provisions of applicable securities legislation.
Forward-looking statements are typically identified by words such
as "anticipate", "continue", "estimate", "expect", "forecast",
"budget", "may", "will", "project", "could", "plan", "intend",
"should", "believe", "outlook", "objective", "aim", "potential",
"target" and similar words suggesting future events or future
performance. In addition, statements relating to "reserves" or
"resources" are deemed to be forward-looking statements as they
involve the implied assessment, based on certain estimates and
assumptions, that the reserves and resources described exist in the
quantities predicted or estimated and can be profitably produced in
the future. In particular, this document contains forward-looking
statements pertaining to, without limitation, the following: that
over the coming months we will reinforce the vision of Penn West as
a premier oil producer, that we have the discipline, drive, and
ample financial flexibility to take the Company forward, that the
dialogue of the Company will change and that the Company will paint
a picture and deliver on the promise of the core assets in the
portfolio, that some discretionary expenses, including turnarounds
and workovers, will be completed in the four quarter, that our
second half development plan remains on time and on budget and is
expected to increase our exit volumes by approximately 3,000 boe
per day, that the Company remains on track to generate total
disposition proceeds in the second half of the year between
$100 million and $200 million,
inclusive of the sales closed in the last quarter, that we will
require less office space in the future as we have limited the same
and scope of our operations this year, that as a result of
dispositions and more anticipated in the fourth quarter,
adjustments to the full year 2016 production guidance but
maintaining annual production in the core areas, 2016 capital
budget and full year guidance for both operating costs and G&A
costs, that both wells in the J-Lease area of Pembina will be
brought on production shortly, that in the Crimson area of
Willesden Green we expect to finish drilling and complete the wells
in late November, that in the Alberta Viking the per well drilling
costs are trending approximately $50
thousand below budget and will be completed with a cemented
liner system and an average of 36 stages per well, with completions
in the area commencing in early November and we expect to have the
wells on production in early December, in the Peace River area that we remain on track to
complete the program by the end of the year and continue to have
approximately 90 percent of our working interest expenditures paid
by our joint venture partner, that the construction of the Harmon
Valley South gathering system will commence the first week of
November, that the startup and commissioning of the power plant is
expected in December of 2017, at which time our agreement will
allow us to meet associated gas conservation targets and
significantly reduce our environmental impact in this area, that
going forward we expect to remain in full compliance with all of
our financial covenants, that we target having hedges in place for
approximately 25 percent to 40 percent of our crude oil exposure,
net of royalties, and 40 percent to 50 percent of our gas exposure,
net of royalties, that we expect to spend approximately
$150 million of total capital,
including decommissioning expenditures in 2017, that the Cardium
will remain the foundation of our development program supported by
incremental growth in the Alberta Viking and meaningful cash
generation at Peace River, that
next year's capital program will deliver core production growth of
at least 10% from the end of 2016 to the end of 2017 and will be
fully paid by our funds flow from operations, and that we will
formalize these plans and update the market in the coming
months.
The forward-looking information is based on certain key
expectations and assumptions made by Penn West, including
expectations and assumptions concerning: prevailing and future
commodity prices and currency exchange rates; applicable royalty
rates and tax laws; interest rates; future well production rates
and reserve volumes; operating costs; the timing of receipt of
regulatory approvals; the performance of existing wells; the
success obtained in drilling new wells; anticipated timing and
results of capital expenditures; the sufficiency of budgeted
capital expenditures in carrying out planned activities; the
timing, location and extent of future drilling operations; the
successful completion of acquisitions and dispositions; the
availability and cost of labour and services; the state of the
economy and the exploration and production business; the
availability and cost of financing; and ability to market oil and
natural gas successfully.
Although Penn West believes that the expectations and
assumptions on which such forward-looking information is based are
reasonable, undue reliance should not be placed on the
forward-looking information because Penn West can give no
assurances that they will prove to be correct. Since
forward-looking information addresses future events and conditions,
by its very nature it involves inherent risks and uncertainties.
Actual results could differ materially from those currently
anticipated due to a number of factors and risks. These include,
but are not limited to: the risks associated with the oil and gas
industry in general such as operational risks in development,
exploration and production; the possibility that we breach one or
more of the financial covenants pursuant to our amending agreements
with the syndicated banks and the holders of our senior, unsecured
notes; delays or changes in plans with respect to exploration or
development projects or capital expenditures; the uncertainty of
estimates and projections relating to reserves, production, costs
and expenses; health, safety and environmental risks; commodity
price and exchange rate fluctuations; interest rate fluctuations;
marketing and transportation; loss of markets; environmental risks;
competition; incorrect assessment of the value of acquisitions;
failure to complete or realize the anticipated benefits of
acquisitions or dispositions; ability to access sufficient capital
from internal and external sources; failure to obtain required
regulatory and other approvals; reliance on third parties; and
changes in legislation, including but not limited to tax laws,
royalties and environmental regulations. Readers are cautioned that
the foregoing list of factors is not exhaustive.
Additional information on these and other factors that could
affect Penn West, or its operations or financial results, are
included in the Company's most recently filed Management's
Discussion and Analysis (See "Forward-Looking Statements" therein),
Annual Information Form (See "Risk Factors" and "Forward-Looking
Statements" therein) and other reports on file with applicable
securities regulatory authorities and may be accessed through the
SEDAR website (www.sedar.com) or Penn West's website.
The forward-looking statements contained in this document speak
only as of the date of this document. Except as expressly required
by applicable securities laws, we do not undertake any obligation
to publicly update or revise any forward-looking statements,
whether as a result of new information, future events or otherwise.
The forward-looking statements contained in this document are
expressly qualified by this cautionary statement.
See also "Forward-Looking Statements" in the attached
Management's Discussion and Analysis.
MANAGEMENT'S DISCUSSION AND
ANALYSIS
For the three and nine months ended September 30, 2016
This management's discussion and analysis of financial condition
and results of operations ("MD&A") of Penn West Petroleum Ltd.
("Penn West", the "Company", "we", "us", "our") should be read in
conjunction with the Company's unaudited interim condensed
consolidated financial statements for the three and nine months
ended September 30, 2016 and the
Company's audited consolidated financial statements and MD&A
for the year ended December 31, 2015.
The date of this MD&A is November 1,
2016. All dollar amounts contained in this MD&A are
expressed in millions of Canadian dollars unless noted
otherwise.
Certain financial measures such as funds flow from operations,
funds flow from operations per share-basic, funds flow from
operations per share-diluted, netback, EBITDA and gross revenues
included in this MD&A do not have a standardized meaning
prescribed by International Financial Reporting Standards ("IFRS")
and therefore are considered non-GAAP measures; accordingly, they
may not be comparable to similar measures provided by other
issuers. This MD&A also contains oil and gas information and
forward-looking statements. Please see the Company's disclosure
under the headings "Non-GAAP Measures", "Oil and Gas Information",
and "Forward-Looking Statements" included at the end of this
MD&A.
Quarterly Financial Summary
(millions, except per
share and production amounts)(unaudited)
|
|
|
|
|
|
|
|
|
Three months ended
(1)
|
Sep.
30
2016
|
June 30
2016
|
Mar. 31
2016
|
Dec. 31
2015
|
Sep. 30
2015
|
June 30
2015
|
Mar. 31
2015
|
Dec. 31
2014
|
Gross revenues
(2)
|
$
|
136
|
$
209
|
$
|
231
|
$
|
273
|
$
|
295
|
$
|
360
|
$
|
340
|
$
|
473
|
Funds flow from
operations
|
32
|
55
|
47
|
39
|
48
|
85
|
77
|
146
|
|
Basic per
share
|
0.06
|
0.11
|
0.09
|
0.08
|
0.10
|
0.17
|
0.15
|
0.29
|
|
Diluted per
share
|
0.06
|
0.11
|
0.09
|
0.08
|
0.10
|
0.17
|
0.15
|
0.29
|
Net
loss
|
(232)
|
(132)
|
(100)
|
(1,606)
|
(764)
|
(28)
|
(248)
|
(1,772)
|
|
Basic per
share
|
(0.46)
|
(0.26)
|
(0.20)
|
(3.20)
|
(1.52)
|
(0.06)
|
(0.49)
|
(3.57)
|
|
Diluted per
share
|
(0.46)
|
(0.26)
|
(0.20)
|
(3.20)
|
(1.52)
|
(0.06)
|
(0.49)
|
(3.57)
|
Dividends
declared
|
-
|
-
|
-
|
-
|
5
|
5
|
5
|
70
|
|
Per share
|
$
|
-
|
$
-
|
$
|
-
|
$
|
-
|
$
|
0.01
|
$
|
0.01
|
$
|
0.01
|
$
|
0.14
|
Production
|
|
|
|
|
|
|
|
|
Liquids (bbls/d)
(3)
|
23,355
|
41,848
|
53,012
|
53,339
|
55,323
|
63,222
|
65,343
|
64,124
|
Natural gas
(mmcf/d)
|
107
|
130
|
144
|
144
|
161
|
168
|
177
|
198
|
Total
(boe/d)
|
41,233
|
63,568
|
77,010
|
77,398
|
82,198
|
91,164
|
94,905
|
97,143
|
|
|
(1)
|
Certain comparative
figures have been reclassified to correspond with current period
presentation.
|
(2)
|
Includes realized
gains and losses on commodity contracts and excludes gains and
losses on foreign exchange hedges.
|
(3)
|
Includes crude oil
and natural gas liquids.
|
Calculation of Funds Flow from Operations
(millions, except per
share amounts)
|
Three months
ended
September
30
|
Nine months
ended
September
30
|
2016
|
2015
|
2016
|
2015
|
Cash flow from
operating activities
|
$
|
(98)
|
$
|
59
|
$
|
(93)
|
$
|
148
|
Change in non-cash
working capital
|
|
16
|
|
(54)
|
|
103
|
|
-
|
Decommissioning
expenditures
|
|
1
|
|
9
|
|
5
|
|
25
|
Monetization of
foreign exchange contracts
|
|
-
|
|
-
|
|
(32)
|
|
(63)
|
Settlements of normal
course foreign exchange contracts
|
|
(9)
|
|
(6)
|
|
(3)
|
|
(31)
|
Monetization of
transportation commitment
|
|
-
|
|
-
|
|
(20)
|
|
-
|
Realized foreign
exchange loss – debt prepayments
|
|
113
|
|
15
|
|
113
|
|
59
|
Realized foreign
exchange loss – debt maturities
|
-
|
|
-
|
|
36
|
|
36
|
Carried operating
expenses (1)
|
4
|
|
3
|
|
11
|
|
9
|
Restructuring charges
– cash portion
|
5
|
|
22
|
|
14
|
|
27
|
Funds flow from
operations (2)
|
$
|
32
|
$
|
48
|
$
|
134
|
$
|
210
|
|
|
|
|
|
|
|
|
|
Per share – funds
flow from operations
|
|
|
|
|
|
|
|
|
Basic per
share
|
$
|
0.06
|
$
|
0.10
|
$
|
0.27
|
$
|
0.42
|
|
Diluted per
share
|
$
|
0.06
|
$
|
0.10
|
$
|
0.27
|
$
|
0.42
|
|
|
(1)
|
The effect of carried
operating expenses from the Company's partner under the Peace River
Oil Partnership.
|
(2)
|
Certain comparative
figures have been reclassified to correspond with current period
presentation.
|
The decline in funds flow from operations from 2015 was mainly
due to lower production volumes as the Company successfully closed
several asset dispositions in 2015 and 2016 as it focused on
strengthening its balance sheet. Additionally, declines in the
commodity price environment, specifically on heavy oil and natural
gas, contributed to the decrease.
During the third quarter of 2016, the Company recorded a
realized foreign exchange loss as it used the disposition proceeds
from the Saskatchewan Viking disposition to prepay senior notes of
US$416 million, CAD$38 million, £25 million and €3 million (2015
- US$56 million, CAD$6 million, £2 million and €1 million).
In the first half of 2016, the Company monetized a total of
US$115 million of foreign exchange
forward contracts on senior notes and permanently disposed of a
pipeline commitment and received $20
million of proceeds from the sale.
Business Strategy
In 2016, the Company successfully closed several asset
dispositions for total proceeds of $1.4
billion. The proceeds from these asset sales were applied
against long-term debt and significantly improved the Company's
financial position which resulted in compliance with all senior
debt financial covenants at September 30,
2016. The Company expects to remain in compliance with all
of its financial covenants for the foreseeable future.
During the third quarter of 2016, Penn West progressed on its
disposition strategy and closed a number of transactions for total
proceeds of approximately $75 million
and associated average production of approximatively 6,000 boe per
day. The Company will continue to streamline its asset portfolio
and focus its operations within the Cardium, Viking and Peace
River areas in Alberta. By
disposing of properties outside of its core areas, the Company
anticipates a lower cost structure in both unit operating costs and
abandonment liabilities.
During the third quarter of 2016, the Company restarted
development activities within its core areas. Within its core
areas, the Company believes its asset base will grow reserves,
increase organic production, and increase funds flow from
operations under the current commodity price environment.
Business Environment
The following table outlines quarterly averages for benchmark
prices and Penn West realized prices for the last five
quarters.
|
Q3
2016
|
Q2
2016
|
Q1 2016
|
Q4 2015
|
Q3 2015
|
Benchmark
prices
|
|
|
|
|
|
|
|
|
|
|
|
WTI crude oil
($US/bbl)
|
$
|
44.95
|
$
|
45.59
|
$
|
33.45
|
$
|
42.18
|
$
|
46.43
|
|
Edm mixed sweet par
price (CAD$/bbl)
|
|
54.68
|
|
54.70
|
|
40.67
|
|
52.85
|
|
56.17
|
|
NYMEX Henry Hub
($US/mcf)
|
|
2.81
|
|
1.95
|
|
2.09
|
|
2.27
|
|
2.77
|
|
AECO Index
(CAD$/mcf)
|
|
2.26
|
|
1.32
|
|
1.97
|
|
2.56
|
|
2.85
|
|
|
|
|
|
|
|
|
|
|
|
Penn West average
sales price (1)
|
|
|
|
|
|
|
|
|
|
|
|
Light oil
(CAD$/bbl)
|
|
53.97
|
|
53.48
|
|
37.44
|
|
50.20
|
|
52.60
|
|
Heavy oil
(CAD$/bbl)
|
|
21.67
|
|
25.18
|
|
14.76
|
|
25.40
|
|
31.20
|
|
NGL
(CAD$/bbl)
|
|
17.91
|
|
18.05
|
|
12.75
|
|
19.53
|
|
15.24
|
|
Total liquids
(CAD$/bbl)
|
|
40.81
|
|
42.98
|
|
29.86
|
|
42.16
|
|
44.83
|
|
Natural gas
(CAD$/mcf)
|
|
2.46
|
|
1.42
|
|
1.96
|
|
2.54
|
|
2.99
|
|
|
|
|
|
|
|
|
|
|
|
Benchmark
differentials
|
|
|
|
|
|
|
|
|
|
|
|
WTI - Edm Light Sweet
($US/bbl)
|
|
(2.96)
|
|
(3.07)
|
|
(3.69)
|
|
(2.46)
|
|
(3.42)
|
|
WTI - WCS Heavy
($US/bbl)
|
$
|
(13.50)
|
$
|
(13.30)
|
$
|
(14.24)
|
$
|
(14.49)
|
$
|
(13.27)
|
|
(1)
Excludes the impact of realized hedging gains or losses.
|
Crude Oil
During the third quarter of 2016, crude oil prices fluctuated
between $US40 and $US50 per barrel as
concerns regarding high inventory levels and ongoing speculation of
an OPEC agreement to limit production resulted in range bound
volatility. WTI averaged $US44.95 per
barrel for the quarter.
Canadian light oil differentials strengthened in the third
quarter to $US2.96 per barrel below
WTI, while heavy oil differentials weakened to $US13.50 per barrel less than WTI as production
re-started at oil sands operations in Northern Alberta after the Fort McMurray wildfires.
As at September 30, 2016, the
Company had the following crude oil hedging positions in place:
Reference
Price
|
Term
|
Price
($/Barrel)
|
Volume
(Barrels/day)
|
WTI
|
Oct 2016 – Dec
2016
|
CAD $69.27
|
8,000
|
WTI
|
Jan 2017 – Mar
2017
|
CAD $69.37
|
3,000
|
WTI
|
Jan 2017 – Dec
2017
|
CAD $66.07
|
3,500
|
Natural Gas
NYMEX Henry Hub natural gas prices remained strong throughout
the quarter averaging $US2.81 per mcf
because of warm weather in North
America and reduced production growth from the United States.
AECO prices increased during the third quarter of 2016 as
intra-Alberta demand returned to
normal levels with oil sands projects in Fort McMurray returning to production
following the wildfires. Ongoing short term restrictions on
the TransCanada pipeline system continued to affect supply and led
to volatility in the AECO spot prices.
Penn West had the following natural gas hedging positions in
place as at September 30,
2016.
Reference
Price
|
Term
|
Price
($/mcf)
|
Volume
(mcf/day)
|
AECO
|
Oct 2016 – Dec
2016
|
CAD $2.96
|
18,700
|
AECO
|
Jan 2017 – Mar
2017
|
CAD $3.03
|
15,000
|
AECO
|
Apr 2017 – Jun
2017
|
CAD $2.70
|
13,200
|
AECO
|
Jul 2017 – Sep
2017
|
CAD $2.71
|
11,300
|
AECO
|
Oct 2017 – Dec
2017
|
CAD $3.00
|
9,400
|
AECO
|
Jan 2017 – Dec
2017
|
CAD $2.92
|
1,900
|
AECO
|
Jan 2018 – Dec
2018
|
CAD $2.89
|
3,800
|
Average Sales Prices
|
Three months
ended September 30
|
Nine months
ended September 30
|
2016
|
2015
|
%
change
|
2016
|
2015
|
%
change
|
|
|
|
|
|
|
|
|
|
|
|
Light oil (per
bbl)
|
$
|
53.97
|
$
|
52.60
|
3
|
$
|
46.16
|
$
|
55.72
|
(17)
|
Commodity gain (loss)
(per bbl) (1)
|
|
15.14
|
|
5.82
|
>100
|
|
11.11
|
|
2.09
|
>100
|
Light oil net (per
bbl)
|
|
69.11
|
|
58.42
|
18
|
|
57.27
|
|
57.81
|
(1)
|
|
|
|
|
|
|
|
|
|
|
|
Heavy oil (per
bbl)
|
|
21.67
|
|
31.20
|
(31)
|
|
20.12
|
|
35.91
|
(44)
|
|
|
|
|
|
|
|
|
|
|
|
NGL (per
bbl)
|
|
17.91
|
|
15.24
|
18
|
|
15.79
|
|
17.81
|
(11)
|
|
|
|
|
|
|
|
|
|
|
|
Natural gas (per
mcf)
|
|
2.46
|
|
2.99
|
(18)
|
|
1.92
|
|
2.95
|
(35)
|
Commodity gain (per
mcf) (1)
|
|
0.13
|
|
0.03
|
>100
|
|
0.23
|
|
0.48
|
(52)
|
Natural gas net (per
mcf)
|
|
2.59
|
|
3.02
|
(14)
|
|
2.15
|
|
3.43
|
(37)
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average (per
boe)
|
|
29.50
|
|
36.05
|
(18)
|
|
27.86
|
|
38.45
|
(28)
|
Commodity gain (loss)
(per boe) (1)
|
|
5.58
|
|
2.83
|
97
|
|
5.19
|
|
1.91
|
>100
|
Weighted average net
(per boe)
|
$
|
35.08
|
$
|
38.88
|
(10)
|
$
|
33.05
|
$
|
40.36
|
(18)
|
|
(1)
Realized risk management gains and losses on commodity contracts
are included in gross revenues.
|
RESULTS OF OPERATIONS
Production
|
Three months
ended
September
30
|
Nine months
ended
September
30
|
Daily
production
|
2016
|
2015
|
%
change
|
2016
|
2015
|
%
change
|
Light oil
(bbls/d)
|
14,236
|
39,052
|
(64)
|
25,658
|
43,009
|
(40)
|
Heavy oil
(bbls/d)
|
5,711
|
11,153
|
(49)
|
9,844
|
11,992
|
(18)
|
NGL
(bbls/d)
|
3,408
|
5,118
|
(33)
|
3,844
|
6,258
|
(39)
|
Natural gas
(mmcf/d)
|
107
|
161
|
(34)
|
127
|
169
|
(25)
|
Total production
(boe/d)
|
41,233
|
82,198
|
(50)
|
60,533
|
89,376
|
(32)
|
The Company closed several asset dispositions in 2016 with
associated average production of approximately 30,000 boe per day
as it focused on reducing its debt levels. This led to a decline in
production from the comparative periods. Significant dispositions
in 2016 include:
- the Saskatchewan Viking disposition in June which had
associated average production of approximately 13,700 boe per
day;
- the Slave Point disposition in April which had associated
average production of approximately 3,900 boe per day; and
- several non-core asset dispositions during the third quarter of
2016 with associated average production of approximately 6,000 boe
per day.
In 2016, the Company experienced strong production results due
to well performance coming in ahead of expectations and
improvements in its base production reliability. During the third
quarter of 2016, average production within the Company's core plays
totalled 21,911 boe per day and was as follows:
- Cardium – 16,168 boe per day
- Peace River – 4,916 boe per
day
- Alberta Viking – 827 boe per
day
During the third quarter of 2016, Penn West restarted capital
activity and drilled two wells in the Cardium, one well in
Peace River and 11 wells within
the Alberta Viking. All wells are planned to be completed in the
fourth quarter of 2016.
Netbacks
|
Three months ended
September 30
|
|
2016
|
2015
|
|
|
Liquids
(bbl)
|
Natural
Gas
(mcf)
|
Combined
(boe)
|
Combined (boe)
|
|
|
|
|
|
|
|
|
|
Operating
netback:
|
|
|
|
|
|
|
|
|
|
Sales price
(1)
|
$
|
40.81
|
$
|
2.46
|
$
|
29.50
|
$
|
36.05
|
|
Commodity gain
(2)
|
|
9.23
|
|
0.13
|
|
5.58
|
|
2.83
|
|
Royalties
|
|
(4.45)
|
|
0.34
|
|
(1.63)
|
|
(2.72)
|
|
Transportation
|
|
(1.37)
|
|
(0.36)
|
|
(1.71)
|
|
(1.55)
|
|
Operating
costs
|
|
(16.40)
|
|
(1.58)
|
|
(13.40)
|
|
(20.45)
|
Netback
|
$
|
27.82
|
$
|
0.99
|
$
|
18.34
|
$
|
14.16
|
|
|
|
|
|
|
|
|
|
|
|
(bbls/d)
|
|
(mmcf/d)
|
|
(boe/d)
|
|
(boe/d)
|
Production
|
|
23,355
|
|
107
|
|
41,233
|
|
82,198
|
|
|
(1)
|
Excluded from the
netback calculation during the third quarter was $3 million of
other income (2015 - $nil) including sulphur sales.
|
(2)
|
Realized risk
management gains and losses on commodity contracts.
|
(3)
|
Certain comparative
figures have been reclassified to correspond with current period
presentation.
|
Overall, netbacks have increased from 2015 due to lower
operating costs due to successful cost reduction activities,
increased commodity gains due to the Company's active hedging
program and a reduction in royalties due to the lower commodity
price environment. The weak commodity price environment partially
offset this, specifically related to heavy oil and natural gas
prices. Operating Costs includes the effect of carried operating
expenses from the Company's partner under the Peace River Oil
Partnership of $4 million or
$1.04 per boe on a combined basis
(2015 - $3 million or $0.44 per boe).
|
Nine months ended
September 30
|
|
2016
|
2015
|
|
|
Liquids
(bbl)
|
Natural
Gas
(mcf)
|
Combined
(boe)
|
Combined (boe)
|
|
|
|
|
|
|
|
|
|
Operating
netback:
|
|
|
|
|
|
|
|
|
|
Sales price
(1)
|
$
|
36.68
|
$
|
1.92
|
$
|
27.86
|
$
|
38.45
|
|
Commodity gain
(2)
|
|
7.25
|
|
0.23
|
|
5.19
|
|
1.91
|
|
Royalties
|
|
(3.02)
|
|
0.44
|
|
(1.04)
|
|
(3.95)
|
|
Transportation
|
|
(1.56)
|
|
(0.35)
|
|
(1.74)
|
|
(1.43)
|
|
Operating
costs
|
|
(14.89)
|
|
(1.58)
|
|
(12.99)
|
|
(19.02)
|
Netback
|
$
|
24.46
|
$
|
0.66
|
$
|
17.28
|
$
|
15.96
|
|
|
|
|
|
|
|
|
|
|
|
(bbls/d)
|
|
(mmcf/d)
|
|
(boe/d)
|
|
(boe/d)
|
Production
|
|
39,346
|
|
127
|
|
60,533
|
|
89,376
|
|
|
(1)
|
Excluded from the
netback calculation in 2016 was $28 million of other income (2015 -
$10 million), mainly related to the proceeds received by the
Company from permanently disposing of a pipeline commitment during
the first quarter.
|
(2)
|
Realized risk
management gains and losses on commodity
contracts.
|
(3)
|
Certain comparative
figures have been reclassified to correspond with current period
presentation.
|
For the first nine months of 2016, operating costs includes the
effect of carried operating expenses from the Company's partner
under the Peace River Oil Partnership of $11
million or $0.66 per boe on a
combined basis (2015 - $9 million or
$0.39 per boe).
Production Revenues
Revenues from the sale of liquids and natural gas consisted of
the following:
|
Three months
ended
September
30
|
Nine months
ended
September
30
|
(millions)
|
2016
|
2015
|
% change
|
2016
|
2015
|
%
change
|
Liquids
|
$
|
110
|
$
|
250
|
(56)
|
$
|
501
|
$
|
837
|
(40)
|
Natural
gas
|
|
26
|
|
45
|
(42)
|
|
75
|
|
158
|
(53)
|
Gross revenues
(1)
|
$
|
136
|
$
|
295
|
(54)
|
$
|
576
|
$
|
995
|
(42)
|
|
|
(1)
|
Includes
realized risk management gains on commodity contracts which totaled
$21 million for the three months ended September 30, 2016 (2015 -
$22 million) and $86 million for the nine months ended September
30, 2016 (2015 - $47 million).
|
Gross revenues are lower than the comparative periods due to a
significant decrease in production volumes as the Company
successfully closed several asset dispositions. The decline in the
commodity price environment also contributed to the decrease which
was partially offset by the weakening of the Canadian dollar
compared to the US dollar from the prior year.
Reconciliation of Change in Production Revenues
(millions)
|
|
|
Gross revenues –
January 1 – September 30,
2015
|
$
|
995
|
Decrease in liquids
production
|
|
(308)
|
Decrease in liquids
prices (1)
|
|
(46)
|
Decrease in natural
gas production
|
|
(39)
|
Decrease in natural
gas prices (1)
|
|
(44)
|
Increase in other
income (2)
|
|
18
|
Gross revenues –
January 1 – September 30, 2016
|
$
|
576
|
|
|
(1)
|
Includes realized
risk management gains and losses on commodity contracts.
|
(2)
|
Other income of $28
million (2015 - $10 million) for the nine months ended September
30, 2016 relates mainly to proceeds received by the Company from
permanently disposing of a pipeline commitment during the first
quarter.
|
Royalties
|
Three months
ended
September
30
|
Nine months
ended
September
30
|
|
2016
|
2015
|
%
change
|
2016
|
2015
|
%
change
|
Royalties
(millions)
|
$
|
6
|
$
|
20
|
(70)
|
$
|
17
|
$
|
96
|
(82)
|
Average royalty rate
(1)
|
|
5%
|
|
7%
|
(29)
|
|
4%
|
|
10%
|
(70)
|
$/boe
|
$
|
1.63
|
$
|
2.72
|
(40)
|
$
|
1.04
|
$
|
3.95
|
(74)
|
|
(1)
Excludes effects of risk management activities.
|
Royalties have decreased from the comparative periods mainly due
to the impact of asset disposition activity completed in 2015 and
2016 and decreases in the commodity price environment. In the
second quarter of 2016, the Company received its annual gas cost
allowance invoice which resulted in the release of an $8 million provision related to the asset
disposition activity completed in 2015.
Expenses
|
Three months
ended
September
30
|
Nine months
ended
September
30
|
(millions)
|
2016
|
2015
|
%
change
|
2016
|
2015
|
%
change
|
Operating
|
$
|
55
|
$
|
159
|
(65)
|
$
|
227
|
$
|
474
|
(52)
|
Transportation
|
|
7
|
|
12
|
(42)
|
|
29
|
|
35
|
(17)
|
Financing
|
|
22
|
|
40
|
(45)
|
|
103
|
|
120
|
(14)
|
Share-based
compensation
|
$
|
4
|
$
|
(4)
|
>100
|
$
|
11
|
$
|
3
|
>100
|
|
Three months
ended
September
30
|
Nine months
ended
September
30
|
(per boe)
|
2016
|
2015
|
%
change
|
2016
|
2015
|
%
change
|
Operating
(1)
|
$
|
13.40
|
$
|
20.45
|
(34)
|
$
|
12.99
|
$
|
19.02
|
(32)
|
Transportation
|
|
1.71
|
|
1.55
|
10
|
|
1.74
|
|
1.43
|
22
|
Financing
|
|
5.70
|
|
5.26
|
8
|
|
6.20
|
|
4.91
|
26
|
Share-based
compensation
|
$
|
1.23
|
$
|
(0.51)
|
>100
|
$
|
0.70
|
$
|
0.11
|
>100
|
|
|
(1)
|
Includes the
effect of carried operating expenses from its partner under the
Peace River Oil Partnership of $4 million or $1.04 per boe (2015 -
$3 million or $0.44 per boe) for the three months ended September
30, 2016 and $11 million or $0.66 per boe (2015 - $9 million or
$0.39 per boe) for the nine months ended September 30,
2016.
|
Operating
The Company significantly improved its cost structure from 2015
as it progressed on several cost saving initiatives focused on
repair & maintenance and workover categories. Additionally, in
2015 and 2016, Penn West closed several asset dispositions and
high-graded its portfolio by disposing of non-core, high operating
cost properties. In 2016, the Company benefited from the continued
weak commodity price environment which resulted in cost savings
across the industry.
The Company deferred a number of discretionary expenses,
primarily turnarounds and workover activities, to later in the
year. As a result, the Company is maintaining its annual
operating cost per boe target for 2016 of $13.50 - $14.50 per boe.
Operating costs for the third quarter of 2016 included a
realized loss of $1 million (2015 –
$6 million) and for the nine months
ended September 30, 2016 included a
realized loss of $5 million (2015 –
$10 million) on electricity
contracts.
Financing
At September 30, 2016, the Company
had a secured, revolving syndicated bank facility with an aggregate
borrowing limit of $1.2 billion and
an extendible five-year term (May 6,
2019 maturity date). The syndicated bank facility contains
provisions for stamping fees on bankers' acceptances and LIBOR
loans and standby fees on unutilized credit lines that vary
depending on certain financial ratios. At September 30, 2016, the Company had $848 million of unused credit capacity
available.
At September 30, 2016, the value
of the Company's senior notes was $576
million (December 31, 2015 –
$1.5 billion).
In the first nine months of 2016, the Company prepaid senior
notes in aggregate of $627 million
(2015 - $358 million) and a total of
$340 million (2015 – $56 million) of indebtedness was repaid under the
Company's syndicated bank facility.
In September 2016, the Company
offered an additional $448 million of
net proceeds received from dispositions during the year for
prepayment of outstanding senior notes. The offer to holders of the
Company's senior notes was substantially accepted and $437 million was subsequently prepaid in
October 2016. The remaining
$11 million was used to repay
indebtedness on the Company's syndicated bank facility.
Including the payments in October, in 2016 the Company has
completed prepayments to its lenders totalling $1,415 million (2015 - $414 million) which includes prepayments of
senior notes of $1,064 million (2015
- $358 million) and repayments of
indebtedness under the Company's syndicated bank facility of
$351 million (2015 – $56 million).
There were no senior note issuances in either 2016 or 2015.
Summary information on our senior notes outstanding as at
September 30, 2016 is as follows:
|
Issue date
|
Amount
(millions)
|
Term
|
Average
interest
rate (1)
|
Weighted
average
remaining
term
|
2007 Notes
|
May 31,
2007
|
US$92
|
8 – 15
years
|
6.86%
|
1.8
|
2008 Notes
|
May 29,
2008
|
US$103,
CAD$14
|
8 – 12
years
|
7.30%
|
2.0
|
UK Notes
|
July 31,
2008
|
£16
|
10 years
|
6.95%
(2)
|
1.8
|
2009 Notes
|
May 5,
2009
|
US$20 (3),
£7, €3
|
5 – 10
years
|
9.83%
(4)
|
2.3
|
2010 Q1
Notes
|
March 16,
2010
|
US$71
|
5 – 15
years
|
6.68%
|
2.9
|
2010 Q4
Notes
|
December 2, 2010,
January 4, 2011
|
US$58,
CAD$13
|
5 – 15
years
|
5.94%
|
4.9
|
2011 Notes
|
November 30,
2011
|
US$36,
CAD$8
|
5 – 10
years
|
5.49%
|
3.5
|
|
(1)
|
Average interest rate
can fluctuate based on debt to EBITDA ratio which expires on March
30, 2017, the date the covenant relief period ends with the bank
syndicate and noteholders.
|
(2)
|
These notes currently
bear interest at 7.95 percent in Pounds Sterling, however,
contracts were entered to fix the interest rate at 6.95 percent in
Canadian dollars and to fix the exchange rate on the
repayment.
|
(3)
|
A portion of the 2009
Notes have equal repayments, which began in 2013 with a repayment
of US$5 million, and extend over the remaining years.
|
(4)
|
The Company entered
contracts to fix the interest rate on the Pounds Sterling and Euro
tranches, at 10.15 percent and 10.22 percent, to 9.15 percent and
9.22 percent, respectively, and to fix the exchange rate on
repayment.
|
Penn West's debt structure includes short-term financings under
its syndicated bank facility and long-term financing through its
senior notes. Financing charges in 2016 decreased compared to 2015
as the Company reduced debt levels as it applied disposition
proceeds to re-pay indebtedness on the Company's syndicated bank
facility and pre-paid outstanding senior notes, which resulted in
lower interest charges.
In May 2015, the Company finalized
amended agreements with the lenders under its syndicated bank
facility and with the holders of its senior notes which resulted in
amended financial covenants and led to increases in the fee
structure. The fee structure on the Company's senior notes will
change during the amendment period (up until March 30, 2017) as follows:
Senior debt to EBITDA
ratio
|
Basis points per
annum increase
|
Less than or equal to
3:1
|
|
50
|
Greater than 3:1 and
less than or equal to 4:1
|
|
100
|
Greater than 4:1 and
less than or equal to
4.5:1
|
|
150
|
Greater than
4.5:1
|
|
200
|
See "Liquidity and Capital Resources – Liquidity" for further
details on the amendments.
The interest rates on any non-hedged portion of the Company's
syndicated bank facility are subject to fluctuations in short-term
money market rates as advances on the syndicated bank facility are
generally made under short-term instruments. As at September 30, 2016, 37 percent (December 31, 2015 – 24 percent) of Penn West's
long-term debt instruments was exposed to changes in short-term
interest rates.
Share-Based Compensation
Share-based compensation expense relates to the Company's Stock
Option Plan (the "Option Plan"), Restricted Share Unit Plan
("RSU"), Deferred Share Unit Plan ("DSU") and Performance Share
Unit Plan ("PSU").
Share-based compensation consisted of the following:
|
Three months
ended
September
30
|
Nine months
ended
September
30
|
(millions)
|
2016
|
2015
|
%
change
|
2016
|
2015
|
%
change
|
Options
|
$
|
1
|
$
|
1
|
-
|
$
|
2
|
$
|
3
|
(33)
|
RSU – liability
method
|
|
1
|
|
(4)
|
>100
|
|
3
|
|
-
|
100
|
RSU – equity
method
|
|
1
|
|
-
|
100
|
|
4
|
|
-
|
100
|
PSU
|
|
1
|
|
(1)
|
>100
|
|
2
|
|
-
|
100
|
Share-based
compensation
|
$
|
4
|
$
|
(4)
|
>100
|
$
|
11
|
$
|
3
|
>100
|
The share price used in the fair value calculation of the RSU
plan (liability method), PSU and DSU obligations at September 30, 2016 was $2.35 (September 30,
2015 – $0.60). Share-based
compensation related to the DSU was insignificant in both
periods.
General and Administrative Expenses
|
Three months
ended
September
30
|
Nine months
ended
September
30
|
(millions, except per
boe amounts)
|
2016
|
2015
|
%
change
|
2016
|
2015
|
%
change
|
Gross
|
$
|
22
|
$
|
36
|
(39)
|
$
|
65
|
$
|
113
|
(42)
|
|
Per
boe
|
|
5.82
|
|
4.74
|
23
|
|
3.91
|
|
4.61
|
(15)
|
Net
|
|
14
|
|
23
|
(39)
|
|
43
|
|
68
|
(37)
|
|
Per boe
|
$
|
3.74
|
$
|
3.02
|
24
|
$
|
2.59
|
$
|
2.79
|
(7)
|
In 2015 and 2016, the Company has significantly decreased its
workforce due to asset disposition activity which led to reductions
in the absolute expense. On a per boe basis, the lower production
volumes from asset disposition activity contributed to the increase
on a quarterly basis. For 2016, the Company is continuing to
forecast G&A per boe at $2.50 -
$2.90.
Restructuring Expense
|
Three months
ended
September
30
|
Nine months
ended
September
30
|
(millions, except per
boe amounts)
|
2016
|
2015
|
%
change
|
2016
|
2015
|
%
change
|
Restructuring
|
$
|
111
|
$
|
22
|
>100
|
$
|
122
|
$
|
27
|
>100
|
|
Per
boe
|
$
|
29.25
|
$
|
2.90
|
>100
|
$
|
7.34
|
$
|
1.12
|
>100
|
In 2016, the Company recorded a charge totaling $108 million (2015 – nil) on certain office lease
commitments as they were classified as onerous contracts. This
charge was the result of completing several asset dispositions in
2016 and the associated reductions in staff, consequently the
Company requires less office space in the future.
During the first nine months of 2016, the Company reduced its
headcount in response to reduced activity levels and the low
commodity price environment. As the Company continues to progress
through its disposition strategy, further headcount reductions will
occur resulting in additional restructuring expenses.
Depletion, Depreciation, Impairment and Accretion
|
Three months
ended
September
30
|
Nine months
ended
September
30
|
(millions, except per
boe amounts)
|
2016
|
2015
|
%
change
|
2016
|
2015
|
%
change
|
Depletion and
depreciation ("D&D")
|
$
|
62
|
$
|
155
|
(60)
|
$
|
295
|
$
|
510
|
(42)
|
D&D expense per
boe
|
|
16.57
|
|
20.38
|
(19)
|
|
17.87
|
|
20.88
|
(14)
|
|
|
|
|
|
|
|
|
|
|
|
PP&E
impairment
|
|
18
|
|
834
|
(98)
|
|
223
|
|
834
|
(73)
|
PP&E impairment
per boe
|
|
4.75
|
|
110.29
|
(96)
|
|
13.45
|
|
34.18
|
(61)
|
|
|
|
|
|
|
|
|
|
|
|
E&E
impairment
|
|
51
|
|
-
|
100
|
|
89
|
|
-
|
100
|
E&E impairment
per boe
|
|
13.44
|
|
-
|
100
|
|
5.37
|
|
-
|
100
|
|
|
|
|
|
|
|
|
|
|
|
Accretion of
decommissioning provision
|
|
4
|
|
9
|
(56)
|
|
18
|
|
28
|
(36)
|
Accretion expense per
boe
|
$
|
1.19
|
$
|
1.23
|
(3)
|
$
|
1.09
|
$
|
1.15
|
(5)
|
The Company's D&D expense has decreased from the comparative
periods mainly due to asset dispositions that closed in 2015 and
2016 and impairment charges recorded in 2015.
During the third quarter of 2016, the Company recorded
$13 million of PP&E impairment
($18 million before-tax) as certain
natural gas properties located within British Columbia were recorded at the lesser
of fair value less costs to sell and their carrying amount. Also
during the third quarter of 2016, the Company impaired certain
E&E properties located within British
Columbia as it no longer has future plans for development in
this area. The E&E impairment recorded totaled $37 million ($51
million before-tax). The Company plans to focus capital
activities within its core areas in the Cardium, Viking and Peace
River all within Alberta
During the first half of 2016, the Company entered agreements to
dispose of properties as it progressed on its disposition strategy
and increase its financial flexibility. As the book value of these
assets exceeded the fair value received, non-cash impairment
charges of $150 million ($205 million before-tax) related to PP&E and
$27 million ($38 million before-tax) related to E&E were
recorded.
Taxes
|
Three months
ended
September
30
|
Nine months
ended
September
30
|
(millions)
|
2016
|
2015
|
%
change
|
2016
|
2015
|
%
change
|
Deferred tax
recovery
|
$
|
(83)
|
$
|
(258)
|
(68)
|
$
|
(186)
|
$
|
(252)
|
(26)
|
|
|
|
|
|
|
|
|
|
|
|
During the third quarter of 2016, the deferred tax recovery was
related to the restructuring charge on office lease contracts and
the impairment of the deferred funding asset held under the Cordova
Joint Venture and associated E&E impairment. On a year-to-date
basis, the deferred tax recovery also includes non-cash impairment
charges recorded on dispositions during the first half of the
year.
Foreign Exchange
Penn West records unrealized foreign exchange gains or losses to
translate the US., UK and Euro denominated senior notes and the
related accrued interest to Canadian dollars using the exchange
rates in effect on the balance sheet date. Realized foreign
exchange gains or losses are recorded upon repayment of the senior
notes.
The split between realized and unrealized foreign exchange
losses is as follows:
|
Three months
ended
September
30
|
Nine months
ended
September
30
|
(millions)
|
2016
|
2015
|
%
change
|
2016
|
2015
|
%
change
|
Realized foreign
exchange loss on maturities
|
$
|
-
|
$
|
-
|
-
|
$
|
(36)
|
$
|
(36)
|
-
|
Realized foreign
exchange loss on pre-payments
|
|
(113)
|
|
(15)
|
>100
|
|
(113)
|
|
(59)
|
92
|
Unrealized foreign
exchange gain (loss)
|
94
|
|
(89)
|
>100
|
|
235
|
|
(162)
|
>100
|
Foreign exchange gain
(loss)
|
$
|
(19)
|
$
|
(104)
|
(82)
|
$
|
86
|
$
|
(257)
|
>100
|
During 2016, Penn West repaid senior notes in an aggregate
amount of US$141 million (2015 -
US$193 million and CAD$50 million) as part of normal course
maturities. Additional amounts of US$416
million, CAD$38 million, £25
million and €3 million (2015 - US$258
million, CAD$24 million, £10
million and €2 million) of senior notes were prepaid as a result of
the offers made at par to its noteholders using asset disposition
proceeds during the year.
The unrealized gain in 2016 is due to the strengthening of the
Canadian dollar relative to the US dollar.
Net loss
|
Three months
ended
September
30
|
Nine months
ended
September
30
|
(millions, except per
share amounts)
|
2016
|
2015
|
%
change
|
2016
|
2015
|
%
change
|
Net loss
|
$
|
(232)
|
$
|
(764)
|
(70)
|
$
|
(464)
|
$
|
(1,040)
|
(55)
|
|
Basic per
share
|
|
(0.46)
|
|
(1.52)
|
(70)
|
|
(0.92)
|
|
(2.07)
|
(56)
|
|
Diluted per
share
|
$
|
(0.46)
|
$
|
(1.52)
|
(70)
|
$
|
(0.92)
|
$
|
(2.07)
|
(56)
|
The net loss in the third quarter of 2016 was mainly attributed
to a realized foreign exchange loss on debt prepayments, a
restructuring charge on office lease contracts, the impairment of
the deferred funding asset held under the Cordova Joint Venture and
associated E&E impairment.
The net loss in the first nine months of 2016 also included
non-cash impairment charges as a result of asset disposition
activity during the first half of the year. This was partially
offset by unrealized foreign exchange gains due to the
strengthening of the Canadian dollar compared to the US dollar.
Capital Expenditures
|
Three months
ended
September
30
|
Nine months
ended
September
30
|
(millions)
|
2016
|
2015
|
%
change
|
2016
|
2015
|
%
change
|
Land acquisition and
retention
|
$
|
1
|
$
|
-
|
100
|
$
|
2
|
$
|
1
|
100
|
Drilling and
completions
|
|
13
|
|
93
|
(86)
|
|
31
|
|
256
|
(88)
|
Facilities and well
equipping
|
|
4
|
|
31
|
(87)
|
|
20
|
|
122
|
(84)
|
Geological and
geophysical
|
|
-
|
|
-
|
-
|
|
2
|
|
2
|
-
|
Corporate
|
|
-
|
|
1
|
(100)
|
|
-
|
|
5
|
(100)
|
Capital carried by
partners
|
|
(5)
|
|
(9)
|
(44)
|
|
(23)
|
|
(15)
|
53
|
Exploration and
development capital expenditures (1)
|
|
13
|
|
116
|
(89)
|
|
32
|
|
371
|
(91)
|
SR&ED tax
credits
|
|
-
|
|
-
|
-
|
|
(3)
|
|
-
|
(100)
|
Property
dispositions, net
|
|
(76)
|
|
1
|
>(100)
|
|
(1,401)
|
|
(411)
|
>100
|
Total capital
expenditures
|
$
|
(63)
|
$
|
117
|
>(100)
|
$
|
(1,372)
|
$
|
(40)
|
>100
|
|
(1) Capital
expenditures include costs related to Property, Plant and Equipment
and Exploration and Evaluation activities.
|
During the third quarter of 2016, the Company advanced on its
second half 2016 capital program which resulted in two wells
drilled in the Cardium, one well in Peace
River and 11 wells in the Alberta Viking. Capital activities
in the fourth quarter of 2016 will be focused on completion and
tie-in of these wells in addition to further drilling within the
Cardium and Peace River.
In 2016, the Company reduced its capital program in comparison
to 2015 as a result of the low commodity price environment as it
targets its annual expenditures to be within funds flow from
operations.
The Company made significant progress on its asset disposition
initiatives in 2016 as it closed its Saskatchewan Viking
disposition in June 2016 for total
proceeds of approximately $975
million, subject to closing adjustments, and closed its
Slave Point disposition located in Northern Alberta in April 2016 for total proceeds of approximately
$148 million, subject to closing
adjustments. During the third quarter of 2016, the Company
progressed further on its disposition strategy and closed several,
non-core property dispositions. The Company will continue to
advance on its disposition initiatives in the fourth quarter of
2016.
Exploration and evaluation ("E&E") capital
expenditures
|
Three months
ended
September
30
|
Nine months
ended
September
30
|
(millions)
|
2016
|
2015
|
%
change
|
2016
|
2015
|
%
change
|
E&E capital
expenditures
|
$
|
-
|
$
|
3
|
(100)
|
$
|
-
|
$
|
10
|
(100)
|
In 2016, E&E expenditures were minimal as the Company
focused activities on development within its core plays.
Loss (gain) on asset dispositions
|
Three months
ended
September
30
|
Nine months
ended
September
30
|
(millions)
|
2016
|
2015
|
%
change
|
2016
|
2015
|
%
change
|
Loss (gain) on asset
dispositions
|
$
|
2
|
$
|
1
|
100
|
$
|
(30)
|
$
|
(94)
|
(68)
|
During the first nine months of 2016, Penn West closed several
asset dispositions, including the Saskatchewan Viking disposition
as it continued to reduce debt and focus its asset portfolio. For
the first nine months of 2016, $9
million of transaction costs were incurred (2015 -
$3 million).
Environmental and Climate Change
The oil and gas industry has a number of environmental risks and
hazards and is subject to regulation by all levels of government.
Environmental legislation includes, but is not limited to,
operational controls, site restoration requirements and
restrictions on emissions of various substances produced in
association with oil and natural gas operations. Compliance with
such legislation could require additional expenditures and a
failure to comply may result in fines and penalties which could, in
the aggregate and under certain assumptions, become material.
Penn West is dedicated to reducing the environmental impact from
its operations through its environmental programs which include
resource conservation, water management and site
abandonment/reclamation/remediation. Operations are continuously
monitored to minimize environmental impact and allocate sufficient
capital to reclamation and other activities to mitigate the impact
on the areas in which the Company operates.
Liquidity and Capital Resources
Capitalization
|
September 30,
2016
|
December 31,
2015
|
% change
|
Common shares issued,
at market (1)
|
1,181
|
588
|
>100
|
Bank loans and
long-term notes
|
912
|
1,940
|
(53)
|
Cash
|
(447)
|
(2)
|
>100
|
Total enterprise
value (2)
|
1,646
|
2,526
|
(35)
|
|
(1) The share
price at September 30, 2016 was $2.35 (December 31, 2015 -
$1.17).
|
(2) Certain
comparative figures have been reclassified to correspond with
current period presentation.
|
The Company's working capital deficiency at September 30, 2016 was $20
million (December 31, 2015 –
$182 million) which excludes the
current portion of deferred funding asset, risk management,
long-term debt, provisions and $448
million of cash that was offered as a pre-payment to its
lenders.
Dividends
|
Three months
ended
September
30
|
Nine months
ended
September
30
|
(millions, except per
share amounts)
|
2016
|
2015
|
%
change
|
2016
|
2015
|
%
change
|
Dividends
declared
|
$
|
-
|
$
|
5
|
(100)
|
$
|
-
|
$
|
15
|
(100)
|
Per share
|
|
-
|
|
0.01
|
(100)
|
|
-
|
|
0.03
|
(100)
|
|
|
|
|
|
|
|
|
|
|
|
Dividends paid
(1)
|
$
|
-
|
$
|
5
|
(100)
|
$
|
-
|
$
|
80
|
(100)
|
|
(1)
The Company previously had a dividend reinvestment plan, includes
amounts funded through that plan.
|
On September 1, 2015, Penn West
announced that its Board of Directors approved the suspension of
the dividend until further notice, following the October 15, 2015 payment.
Liquidity
The Company has a secured, revolving syndicated bank facility
with an aggregate borrowing limit of $1.2
billion and an extendible five-year term (May 6, 2019 maturity date). For further details
on the Company's debt instruments, please refer to the "Financing"
section of this MD&A.
The Company actively manages its debt portfolio and considers
opportunities to reduce or diversify its debt capital structure.
Management contemplates both operating and financial risks and
takes action as appropriate to limit the Company's exposure to
certain risks. Management maintains close relationships with the
Company's lenders and agents to monitor credit market developments.
These actions and plans aim to increase the likelihood of
maintaining the Company's financial flexibility and capital
program, supporting the Company's ability to capture opportunities
in the market and execute longer-term business
strategies.
The Company has a number of covenants related to its syndicated
bank facility and senior notes. On September
30, 2016, the Company was in compliance with all of these
financial covenants which consisted of the following:
|
Limit
|
September 30,
2016
|
Senior debt to EBITDA
(1)
|
Less than
4.5:1
|
1.95
|
Total debt to EBITDA
(1)
|
Less than
4.5:1
|
1.95
|
Senior debt to
capitalization
|
Less than
50%
|
16%
|
Total debt to
capitalization
|
Less than
55%
|
16%
|
|
|
(1)
|
EBITDA is calculated
in accordance with Penn West's lending agreements wherein
unrealized risk management gains and losses and impairment
provisions are excluded.
|
The table below outlines the Company's senior debt to EBITDA
calculation as at September 30,
2016:
|
|
|
|
Three months
ended
|
Trailing
12
months
|
(millions, except
ratios)
|
Sep. 30
2016
|
June 30
2016
|
Mar. 31
2016
|
Dec. 31
2015
|
Sep.
30
2016
|
Cash flow from
operating activities
|
$
|
(98)
|
$
|
(56)
|
$
|
61
|
$
|
27
|
$
|
(66)
|
Change in non-cash
working capital
|
|
16
|
|
61
|
|
26
|
|
(31)
|
|
72
|
Decommissioning
expenditures
|
|
1
|
|
2
|
|
2
|
|
11
|
|
16
|
Financing
|
|
22
|
|
41
|
|
40
|
|
42
|
|
145
|
Realized gain on
foreign exchange hedges on prepayments
|
|
(9)
|
|
-
|
|
-
|
|
(9)
|
|
(18)
|
Realized foreign
exchange loss – debt prepayments
|
|
113
|
|
-
|
|
-
|
|
64
|
|
177
|
Restructuring
expenses – cash portion
|
|
5
|
|
3
|
|
6
|
|
6
|
|
20
|
EBITDA
|
$
|
50
|
$
|
51
|
$
|
135
|
$
|
110
|
$
|
346
|
EBITDA contribution
from assets sold (1)
|
|
|
|
|
|
|
|
|
|
(105)
|
EBITDA as defined by
debt agreements
|
|
|
|
|
|
|
|
|
$
|
241
|
|
|
|
|
|
|
|
|
|
|
|
Long-term
debt
|
|
|
|
|
|
|
|
|
$
|
912
|
Repayment from
disposition proceeds (2)
|
|
|
|
|
|
|
|
|
|
(448)
|
Letters of credit –
financial (3)
|
|
|
|
|
|
|
|
|
|
5
|
Total senior
debt
|
|
|
|
|
|
|
|
|
$
|
469
|
|
|
|
|
|
|
|
|
|
|
|
Senior debt to
EBITDA
|
|
|
|
|
|
|
|
|
|
1.95
|
|
(1)
Consists of EBITDA contributions from assets that have been
disposed in the prior 12 months.
|
(2)
Was offered to noteholders prior to September 30, 2016 and repaid
in October 2016.
|
(3)
Letters of credit that are classified as financial are included in
the senior debt calculation per the debt agreements.
|
(4)
Certain comparative figures have been reclassified to correspond
with current period presentation.
|
In September 2016, the Company
offered $448 million of net proceeds
received from dispositions during the year for prepayment of
outstanding senior notes. The offer to holders of the Company's
senior notes was substantially accepted and $437 million was subsequently pre-paid in
October 2016. The remaining
$11 million was used to repay
indebtedness on the Company's syndicated bank facility. As the
offer was made prior to September 30,
2016, the $448 million was
excluded from long-term debt in the debt to EBITDA calculation,
consistent with the Company's credit agreements.
On September 30, 2016, including
the benefit of the $448 million
offered to the Company's lenders, pro forma long-term debt was
$464 million.
In May 2015, the Company finalized
amending agreements with the lenders under its syndicated bank
facility and with the holders of its senior notes to, among other
things, amend its financial covenants as follows:
- the maximum Senior Debt to EBITDA and Total Debt to EBITDA
ratio will be less than or equal to 5:1 for the period January 1, 2015 through and including
June 30, 2016, decreasing to less
than or equal to 4.5:1 for the quarter ending September 30, 2016 and decreasing to less than or
equal to 4:1 for the quarter ending December
31, 2016;
- the Senior Debt to EBITDA ratio will decrease to less than or
equal to 3:1 for the period from and after January 1, 2017; and
- the Total Debt to EBITDA ratio will remain at less than or
equal to 4:1 for all periods after September
30, 2016.
The Company also agreed to the following:
- to temporarily grant floating charge security over all of its
property in favor of the lenders and the noteholders on a pari
passu basis, which security will be fully released upon the Company
achieving both (i) a Senior Debt to EBITDA ratio of 3:1 or less for
four consecutive quarters, and (ii) an investment grade rating on
its senior secured debt;
- to cancel the $500 million
tranche of the Company's existing $1.7
billion syndicated bank facility that was set to expire on
June 30, 2016, the remaining
$1.2 billion tranche of the
syndicated bank facility remains available to the Company in
accordance with the terms of the agreements governing such
facility;
- to temporarily reduce its quarterly dividend commencing in the
first quarter of 2015 to $0.01 per
share or less until the earlier of (i) the Senior Debt to EBITDA
being less than 3:1 for two consecutive quarters ending on or after
September 30, 2015, and (ii)
March 30, 2017; and
- until March 30, 2017, to use net
proceeds from any asset dispositions to repay at par $650 million of the outstanding principal amounts
owing to noteholders, with corresponding pro rata amounts from such
asset dispositions to be used to repay any outstanding amounts
drawn under its syndicated bank facility. In 2015 and 2016, the
Company closed $2.2 billion in asset
dispositions and these proceeds were used for debt prepayments to
its noteholders and syndicated bank facility. As the Company
reached the threshold of $650 million
in 2015, additional repayments to lenders are at the discretion of
the Company.
Financial Instruments
The Company had the following financial instruments outstanding
as at September 30, 2016. Fair values
are determined using external counterparty information, which is
compared to observable market data. Penn West limits its credit
risk by executing counterparty risk procedures which include
transacting only with institutions within its syndicated bank
facility or with high credit ratings and by obtaining financial
security in certain circumstances.
|
Notional
volume
|
Remaining
Term
|
Pricing
|
Fair value
(millions)
|
Natural
gas
|
|
|
|
|
|
|
AECO Swaps
|
14,000
mcf/d
|
Oct/16 –
Dec/16
|
$3.05/mcf
|
$
|
1
|
|
AECO Swaps
|
4,700
mcf/d
|
Oct/16 –
Dec/16
|
$2.69/mcf
|
|
-
|
|
AECO Swaps
|
15,000
mcf/d
|
Jan/17 –
Mar/17
|
$3.03/mcf
|
|
-
|
|
AECO Swaps
|
13,200
mcf/d
|
Apr/17 –
Jun/17
|
$2.70/mcf
|
|
-
|
|
AECO Swaps
|
11,300
mcf/d
|
Jul/17 –
Sep/17
|
$2.71/mcf
|
|
-
|
|
AECO Swaps
|
9,400
mcf/d
|
Oct/17 –
Dec/17
|
$3.00/mcf
|
|
-
|
|
AECO Swaps
|
1,900
mcf/d
|
Jan/17 –
Dec/17
|
$2.92/mcf
|
|
-
|
|
AECO Swaps
|
3,800
mcf/d
|
Jan/18 –
Dec/18
|
$2.89/mcf
|
|
-
|
|
|
|
|
|
|
Crude
Oil
|
|
|
|
|
|
|
WTI Swaps
|
3,000
bbl/d
|
Oct/16 –
Dec/16
|
$64.58/bbl
|
|
-
|
|
WTI Swaps
|
5,000
bbl/d
|
Oct/16 –
Dec/16
|
$72.08/bbl
|
|
5
|
|
WTI Swaps
|
3,000
bbl/d
|
Jan/17 –
Mar/17
|
$69.37/bbl
|
|
1
|
|
WTI Swaps
|
3,500
bbl/d
|
Jan/17 –
Dec/17
|
$66.07/bbl
|
|
(1)
|
Electricity
swaps
|
|
|
|
|
|
|
Alberta Power
Pool
|
25 MW
|
Oct/16 –
Dec/16
|
$49.90/MWh
|
|
(2)
|
|
|
|
|
|
|
Foreign exchange
forwards on senior notes
|
|
|
|
|
3 to 15-year initial
term
|
US$25
|
2017
|
1.000
CAD/USD
|
|
8
|
Cross currency
swaps
|
|
|
|
|
|
10-year initial
term
|
£57
|
2018
|
2.0075 CAD/GBP,
6.95%
|
|
(17)
|
|
10-year initial
term
|
£20
|
2019
|
1.8051 CAD/GBP,
9.15%
|
|
(1)
|
|
10-year initial
term
|
€10
|
2019
|
1.5870 CAD/EUR,
9.22%
|
|
(1)
|
|
|
|
|
|
|
Total
|
|
|
|
$
|
(7)
|
The components of risk management gain are as follows:
|
Three months
ended
September
30
|
Nine months
ended
September
30
|
(millions)
|
2016
|
2015
|
%
change
|
2016
|
2015
|
%
change
|
Realized
|
|
|
|
|
|
|
|
Settlement of
commodity contracts
|
|
|
|
|
|
|
|
|
|
|
|
and
assignment
|
$
|
21
|
$
|
22
|
(5)
|
$
|
84
|
$
|
29
|
>100
|
|
Monetization of
commodity contracts
|
|
-
|
-
|
-
|
2
|
18
|
(89)
|
|
Settlement of foreign
exchange contracts
|
|
9
|
6
|
50
|
3
|
31
|
(90)
|
|
Monetization of
foreign exchange contracts
|
|
-
|
-
|
-
|
32
|
63
|
(49)
|
Total realized
risk management gain
|
|
30
|
28
|
7
|
121
|
141
|
(14)
|
|
|
|
|
|
|
|
Unrealized
|
|
|
|
|
|
|
|
Commodity
contracts
|
(5)
|
48
|
>(100)
|
(41)
|
6
|
>(100)
|
|
Electricity
swaps
|
-
|
(3)
|
>(100)
|
2
|
4
|
(50)
|
|
Crude oil
assignment
|
-
|
4
|
(100)
|
-
|
(3)
|
(100)
|
|
Foreign exchange
contracts
|
4
|
20
|
(80)
|
(43)
|
(23)
|
87
|
|
Cross-currency
swaps
|
(1)
|
7
|
>(100)
|
(29)
|
17
|
>(100)
|
Total
unrealized risk management gain (loss)
|
(2)
|
76
|
>(100)
|
(111)
|
1
|
>(100)
|
Risk management
gain
|
$
|
28
|
$
|
104
|
(73)
|
$
|
10
|
$
|
142
|
(93)
|
In the first nine months of 2016, the Company monetized a total
of US$115 million of foreign exchange
forward contracts on senior notes and unwound AECO swap contracts
totalling 14,100 mcf per day.
Outlook
As a result of the asset dispositions closed in the third
quarter of 2016 with associated average production of approximately
6,000 boe per day, combined with additional dispositions
anticipated in the fourth quarter, the Company is updating its full
year 2016 production guidance to 52,000 – 55,000 boe per day from
55,000 – 57,000 boe per day. Guidance for average core area
production, exploration and development ("E&D") capital
expenditures, decommissioning expenditures and operating costs per
boe all remain unchanged as previously disclosed in the Company's
August 4, 2016 press release. G&A
per boe also remains unchanged, as previously disclosed in the
Company's January 28, 2016 press
release.
Metric
|
|
2016
Guidance Range
|
Average Corporate
Production
|
boe per
day
|
52,000 –
55,000
|
Average Core Area
Production
|
boe per
day
|
22,000 –
24,000
|
|
|
|
E&D Capital
Expenditures
|
$ millions
|
$90
|
Decommissioning
Expenditures
|
$ millions
|
$15
|
|
|
|
Operating Costs
(1)
|
$/boe
|
$13.50 –
$14.50
|
G&A
Costs
|
$/boe
|
$2.50 –
$2.90
|
|
(1)
Net of carried operating expenses under the Peace River Oil
Partnership.
|
This outlook section is included to provide shareholders with
information about Penn West's expectations as at November 1, 2016 for production, exploration and
development capital expenditures, operating costs per boe and
G&A per boe for 2016 and readers are cautioned that the
information may not be appropriate for any other purpose. This
information constitutes forward-looking information. Readers should
note the assumptions, risks and discussion under "Forward-Looking
Statements" and are cautioned that numerous factors could
potentially impact Penn West's capital expenditure levels,
production, operating cost and G&A expenditures performance for
2016, including fluctuations in commodity prices and its ongoing
asset disposition program.
All press releases are available on Penn West's website at
www.pennwest.com, on SEDAR at www.sedar.com, and on EDGAR at
www.sec.gov.
Sensitivity Analysis
Estimated sensitivities to selected key assumptions on funds
flow from operations for the 12 months subsequent to the date of
this MD&A, including risk management contracts entered to date,
are based on forecasted results as discussed in the Outlook
above.
|
Impact on cash
flow
|
Change of:
|
Change
|
$ millions
|
$/share
|
Price per barrel of
liquids
|
$1.00
|
4
|
0.01
|
Liquids
production
|
1,000
bbls/day
|
17
|
0.03
|
Price per mcf of
natural gas
|
$0.10
|
2
|
-
|
Natural gas
production
|
10
mmcf/day
|
6
|
0.01
|
Effective interest
rate
|
1%
|
3
|
0.01
|
Exchange rate ($US
per $CAD)
|
$0.01
|
1
|
-
|
Contractual Obligations and Commitments
Penn West is committed to certain payments over the next five
calendar years and thereafter as follows:
|
2016
|
2017
|
2018
|
2019
|
2020
|
Thereafter
|
Long-term
debt
|
$
|
450
|
$
|
26
|
$
|
32
|
$
|
341
|
$
|
36
|
$
|
27
|
Transportation
|
|
3
|
|
13
|
|
9
|
|
7
|
|
6
|
|
8
|
Power
infrastructure
|
|
4
|
|
14
|
|
8
|
|
8
|
|
8
|
|
6
|
Drilling
rigs
|
|
5
|
|
7
|
|
-
|
|
-
|
|
-
|
|
-
|
Interest
obligations
|
|
8
|
|
20
|
|
18
|
|
8
|
|
2
|
|
2
|
Office lease
(1)
|
|
8
|
|
35
|
|
35
|
|
35
|
|
35
|
|
143
|
Decommissioning
liability (2)
|
$
|
9
|
$
|
17
|
$
|
20
|
$
|
19
|
$
|
18
|
$
|
127
|
|
|
(1)
|
The future office
lease commitments above are to be reduced by contracted sublease
recoveries totalling $115 million.
|
(2)
|
These amounts
represent the inflated, discounted future reclamation and
abandonment costs that are expected to be incurred over the life of
the Company's properties.
|
The Company's syndicated bank facility is due for renewal on
May 6, 2019. In addition, the Company
has an aggregate of US$106 million in
senior notes maturing between 2016 and 2025, after the offer to
holders of the Company's senior notes was subsequently prepaid in
October 2016. If the Company is
unsuccessful in renewing or replacing the syndicated bank facility
or obtaining alternate funding for some or all of the maturing
amounts of the senior notes, it is possible that it could be
required to obtain other facilities, including term bank loans.
The Company is involved in various litigation and claims in the
normal course of business and records provisions for claims as
required.
In February 2016, Penn West
announced it had entered agreements to settle all class action
proceedings in Canada and
United States against the Company
related to damages alleged to have been incurred due to a decline
in Penn West's share price following the announcement in 2014 that
the Company would need to restate certain of its historical
financial statements and related MD&A. The settlement
agreements provide for a payment of $53
million split evenly between Canadian and US investors that
is fully funded by insurance coverage maintained by Penn
West. As a result, the payment will not impact the Company's
cash or financial position. The proposed settlements have received
required court approval in each of Alberta, Ontario and Quebec and in New
York, and all conditions to settlement have been
satisfied. As a result of the approval of these settlements,
there is no further exposure to the Company.
Equity Instruments
|
|
Common shares
issued:
|
|
|
As at September 30,
2016
|
502,543,988
|
|
Stock option
plan
|
51,400
|
|
As at November 1,
2016
|
502,595,388
|
|
|
Options
outstanding:
|
|
|
As at September 30,
2016
|
10,655,875
|
|
Exercised
|
(51,400)
|
|
Forfeited
|
(480,500)
|
|
As at November 1,
2016
|
10,123,975
|
Changes in Internal Control Over Financial Reporting
("ICFR")
Penn West's senior management has evaluated whether there were
any changes in the Company's ICFR that occurred during the period
beginning on July 1, 2016 and ending
on September 30, 2016 that have
materially affected, or are reasonably likely to materially affect,
the Company's ICFR. No changes to Penn West's ICFR were made during
the quarter.
Penn West utilizes the original Internal Control - Integrated
Framework (2013) issued by the Committee of the Sponsoring
Organizations of the Treadway Commission (COSO) to design and
evaluate its internal control over financial reporting.
Future Accounting Pronouncements
The IASB issued IFRS 15 "Revenue from Contracts with Customers"
which replaces IAS 18 "Revenue". IAS 15 specifies revenue
recognition criteria and expanded disclosures for revenue. The new
standard is effective for annual periods beginning on or after
January 1, 2018 and early adoption is
permitted. Penn West is currently assessing the impact of the
standard.
The IASB completed the final sections of IFRS 9 "Financial
Instruments" which replaces IAS 39 "Financial Statement:
Recognition and Measurement". IFRS 9 provides guidance on the
recognition and measurement, impairment and derecognition on
financial instruments. The new standard is effective for annual
periods beginning on or after January 1,
2018 and early adoption is permitted. Penn West is currently
assessing the impact of the standard.
The IASB issued IFRS 16 "Leases" in January 2016 which replaces IAS 17 "Leases". IFRS
16 outlines several new requirements in regards to the recognition,
measurement and disclosure of leases. A key principle within the
standard includes a single lessee accounting model which requires
lessees to recognise assets and liabilities for all leases which
have a term more than 12 months. The accounting for lessors, which
classify leases as either operating or finance, remains
substantially unchanged from the previous standard. The new
standard is effective for annual reporting periods beginning on or
after 1 January 2019. Penn West is
currently assessing the impact of the standard.
Off-Balance-Sheet Financing
The Company has off-balance-sheet financing arrangements
consisting of operating leases. The operating lease payments are
summarized in the "Contractual Obligations and Commitments section"
of this MD&A.
Non-GAAP Measures
Certain financial measures including funds flow from operations,
funds flow from operations per share-basic, funds flow from
operations per share-diluted, netback, EBITDA and gross revenues
included in this MD&A do not have a standardized meaning
prescribed by IFRS and therefore are considered non-GAAP measures;
accordingly, they may not be comparable to similar measures
provided by other issuers. Funds flow from operations is cash flow
from operating activities before changes in non-cash working
capital and decommissioning expenditures which also excludes the
effects of financing related transactions from foreign exchange
contracts and debt repayments/ pre-payments and is representative
of cash related to continuing operations. Funds flow from
operations is used to assess the Company's ability to fund dividend
and planned capital programs. See "Calculation of Funds Flow from
Operations" above for a reconciliation of funds flow from
operations to its nearest measure prescribed by IFRS. Netback is
the per unit of production amount of revenue less royalties,
operating expenses, transportation and realized risk management
gains and losses, and is used in capital allocation decisions and
to economically rank projects. See "Results of Operations –
Netbacks" above for a calculation of the Company's netbacks. EBITDA
is Cash Flow from Operations excluding the impact of changes in
non-cash working capital, decommissioning expenditures, financing
expenses, realized gains and losses on foreign exchange hedges on
prepayments, realized foreign exchange gains and losses on debt
prepayments and restructuring expenses. EBITDA as defined by Penn
West's debt agreements excludes the EBITDA contribution from assets
sold in the prior 12 months and is used within Penn West's covenant
calculations related to its syndicated bank facility and senior
notes. Gross revenue is total revenues including realized risk
management gains and losses on commodity contracts and is used to
assess the cash realizations on commodity sales.
Oil and Gas Information
Barrels of oil equivalent ("boe") may be misleading,
particularly if used in isolation. A boe conversion ratio of six
thousand cubic feet of natural gas to one barrel of crude oil is
based on an energy equivalency conversion method primarily
applicable at the burner tip and does not represent a value
equivalency at the wellhead. Given that the value ratio based on
the current price of crude oil as compared to natural gas is
significantly different from the energy equivalency conversion
ratio of 6:1, utilizing a conversion on a 6:1 basis is misleading
as an indication of value.
Forward-Looking Statements
Certain statements contained in this document constitute
forward-looking statements or information (collectively
"forward-looking statements") within the meaning of the "safe
harbor" provisions of applicable securities legislation. In
particular, this document contains forward-looking statements
pertaining to, without limitation, the following: under "Business
Strategy", that the Company expects to remain in compliance with
all its financial covenants for the foreseeable future, that the
Company will continue to streamline its asset portfolio and focus
its operations within the Cardium, Viking and Peace
River areas in Alberta, by
disposing of properties outside of its core areas the Company
anticipates a lower cost structure in both unit operating costs and
abandonment liabilities, that within the core area, the Company
believes its asset base will grow reserves, increase organic
production, and increase funds flow from operations under the
current commodity price environment; under "Results of Operations –
Production", that the two drilled wells in the Cardium, one in
Peace River and 11 within the
Alberta Viking will all be completed in fourth quarter of 2016;
that the Company has deferred a number of discretionary expenses,
primarily turnarounds and workover activities, to later in the year
resulting in the Company maintaining its annual operating cost per
boe target; under "General and Administrative Expenses",
anticipated range for G&A per boe for 2016; under
"Restructuring Expense", that the Company requires less office
space in the future, as the Company continues to progress through
its disposition strategy and reduces its headcount, further
restructuring expenses will be incurred, that the Company plans to
focus on capital activities within its core areas in the Cardium,
Viking and Peace River all within Alberta; under "Capital Expenditures"; that
capital activities in the fourth quarter of 2016 will be focused on
completion and tie-in of these wells in addition to further
drilling within the Cardium and Peace
River, that the Company will continue to advance on its
disposition initiatives in the fourth quarter of 2016; under
"Environmental and Climate Change", our belief that compliance with
environmental legislation could require additional expenditures and
a failure to comply with such legislation may result in fines and
penalties which could, in the aggregate and under certain
assumptions, become material, our intent to reduce the
environmental impact from our operations through environmental
programs; under "Outlook", the additional dispositions anticipated
for the fourth quarter, the annual corporate production guidance
range, average production from core area properties, exploration
and development capital expenditures and decommissioning
expenditures; operating costs range per boe and G&A per boe
range for 2016; and under "Sensitivity Analysis", the estimated
sensitivities to selected key assumptions on funds flow for the 12
months subsequent to this MD&A. In addition, statements
relating to "reserves" or "resources" are deemed to be
forward-looking statements as they involve the implied assessment,
based on certain estimates and assumptions, that the reserves and
resources described exist in the quantities predicted or estimated
and can be profitably produced in the future.
With respect to forward-looking statements contained in this
document, the Company has made assumptions regarding, among other
things: that the Company does not dispose of additional material
producing properties or royalties or other interests therein; that
the current commodity price and foreign exchange environment will
continue or improve; future capital expenditure levels; future
crude oil, natural gas liquids and natural gas prices and
differentials between light, medium and heavy oil prices and
Canadian, WTI and world oil and natural gas prices; future crude
oil, natural gas liquids and natural gas production levels; future
exchange rates and interest rates; future debt levels; and the
continued suspension of our dividend.
Although the Company believes that the expectations reflected in
the forward-looking statements contained in this document, and the
assumptions on which such forward-looking statements are made, are
reasonable, there can be no assurance that such expectations will
prove to be correct. Readers are cautioned not to place undue
reliance on forward-looking statements included in this document,
as there can be no assurance that the plans, intentions or
expectations upon which the forward-looking statements are based
will occur. By their nature, forward-looking statements involve
numerous assumptions, known and unknown risks and uncertainties
that contribute to the possibility that the forward-looking
statements contained herein will not be correct, which may cause
our actual performance and financial results in future periods to
differ materially from any estimates or projections of future
performance or results expressed or implied by such forward-looking
statements. These risks and uncertainties include, among other
things: the possibility that the Company will not be able to
continue to successfully execute our long-term plan in part or in
full, and the possibility that some or all of the benefits that the
Company anticipates will accrue to our Company and our security
holders as a result of the successful execution of such plan do not
materialize; the possibility that the Company is unable to execute
some or all of our ongoing asset disposition program on favorable
terms or at all; the possibility that we breach one or more of the
financial covenants pursuant to our amending agreements with the
syndicated banks and the holders of our senior, unsecured notes;
general economic and political conditions in Canada, the U.S. and globally, and in
particular, the effect that those conditions have on commodity
prices and our access to capital; industry conditions, including
fluctuations in the price of crude oil, natural gas liquids and
natural gas, price differentials for crude oil and natural gas
produced in Canada as compared to
other markets, and transportation restrictions, including pipeline
and railway capacity constraints; fluctuations in foreign exchange
or interest rates; unanticipated operating events or environmental
events that can reduce production or cause production to be shut-in
or delayed (including extreme cold during winter months, wild fires
and flooding); and the other factors described under "Risk Factors"
in our Annual Information Form and described in our public filings,
available in Canada at
www.sedar.com and in the United
States at www.sec.gov. Readers are cautioned that this list
of risk factors should not be construed as exhaustive.
The forward-looking statements contained in this document speak
only as of the date of this document. Except as expressly required
by applicable securities laws, the Company does not undertake any
obligation to publicly update any forward-looking statements. The
forward-looking statements contained in this document are expressly
qualified by this cautionary statement.
Additional Information
Additional information relating to Penn West, including Penn
West's Annual Information Form, is available on the Company's
website at www.pennwest.com, on SEDAR at www.sedar.com and on EDGAR
at www.sec.gov.
Penn West
Petroleum Ltd.
Consolidated Balance Sheets
|
|
|
|
|
(CAD millions,
unaudited)
|
Note
|
September 30,
2016
|
December 31,
2015
|
|
|
|
|
|
|
Assets
|
|
|
|
|
|
Current
|
|
|
|
|
|
|
Cash
|
6
|
$
|
447
|
$
|
2
|
|
Accounts
receivable
|
|
|
93
|
|
154
|
|
Other
|
|
|
26
|
|
42
|
|
Deferred funding
asset
|
3
|
|
75
|
|
63
|
|
Risk
management
|
8
|
|
15
|
|
44
|
|
|
|
656
|
|
305
|
Non-current
|
|
|
|
|
|
|
Deferred funding
asset
|
3
|
|
29
|
|
168
|
|
Exploration and
evaluation assets
|
4
|
|
146
|
|
243
|
|
Property, plant and
equipment
|
5
|
|
3,118
|
|
5,145
|
|
Risk
management
|
8
|
|
-
|
|
63
|
|
|
|
3,293
|
|
5,619
|
Total
assets
|
|
$
|
3,949
|
$
|
5,924
|
|
|
|
|
|
|
Liabilities and
Shareholders' Equity
|
|
|
|
|
|
Current
|
|
|
|
|
|
|
Accounts payable and
accrued liabilities
|
|
$
|
138
|
$
|
380
|
|
Current portion of
long-term debt
|
6
|
|
469
|
|
222
|
|
Provisions
|
7
|
|
36
|
|
21
|
|
Risk
management
|
8
|
|
3
|
|
3
|
|
|
|
646
|
|
626
|
Non-current
|
|
|
|
|
|
|
Long-term
debt
|
6
|
|
443
|
|
1,718
|
|
Provisions
|
7
|
|
282
|
|
376
|
|
Risk
management
|
8
|
|
19
|
|
-
|
|
Deferred tax
liability
|
|
|
77
|
|
266
|
|
Other non-current
liabilities
|
|
|
4
|
|
3
|
|
|
|
1,471
|
|
2,989
|
Shareholders'
equity
|
|
|
|
|
|
|
Shareholders'
capital
|
9
|
|
8,996
|
|
8,994
|
|
Other
reserves
|
|
|
97
|
|
92
|
|
Deficit
|
|
|
(6,615)
|
|
(6,151)
|
|
|
|
2,478
|
|
2,935
|
Total
liabilities and shareholders' equity
|
|
$
|
3,949
|
$
|
5,924
|
|
See accompanying
notes to the unaudited interim consolidated financial
statements.
|
Subsequent events (Notes 6 and 12)
Commitments and contingencies (Note 11)
Penn West
Petroleum Ltd.
Consolidated Statements of Loss
|
|
|
|
|
Three months
ended
September
30
|
Nine months
ended
September
30
|
(CAD millions, except
per share amounts, unaudited)
|
Note
|
2016
|
2015
|
2016
|
2015
|
|
|
|
|
|
|
|
|
|
|
|
Oil and natural gas
sales and other income
|
|
$
|
115
|
$
|
273
|
$
|
490
|
$
|
948
|
|
Royalties
|
|
|
(6)
|
|
(20)
|
|
(17)
|
|
(96)
|
|
|
|
109
|
|
253
|
|
473
|
|
852
|
|
|
|
|
|
|
|
|
|
|
|
Risk management
gain
|
8
|
|
28
|
|
104
|
|
10
|
|
142
|
|
|
|
137
|
|
357
|
|
483
|
|
994
|
|
|
|
|
|
|
|
|
|
|
Expenses
|
|
|
|
|
|
|
|
|
|
|
Operating
|
|
|
55
|
|
159
|
|
227
|
|
474
|
|
Transportation
|
|
|
7
|
|
12
|
|
29
|
|
35
|
|
General and
administrative
|
|
|
14
|
|
23
|
|
43
|
|
68
|
|
Restructuring
|
7
|
|
111
|
|
22
|
|
122
|
|
27
|
|
Share-based
compensation
|
10
|
|
4
|
|
(4)
|
|
11
|
|
3
|
|
Depletion,
depreciation and impairment
|
4,5
|
|
131
|
|
989
|
|
607
|
|
1,344
|
|
Loss (gain) on
dispositions
|
5
|
|
2
|
|
1
|
|
(30)
|
|
(94)
|
|
Exploration and
evaluation
|
4
|
|
1
|
|
2
|
|
7
|
|
2
|
|
Foreign exchange loss
(gain)
|
6
|
|
19
|
|
104
|
|
(86)
|
|
257
|
|
Financing
|
6
|
|
22
|
|
40
|
|
103
|
|
120
|
|
Accretion
|
7
|
|
4
|
|
9
|
|
18
|
|
28
|
|
Impairment of
goodwill
|
|
|
-
|
|
22
|
|
-
|
|
22
|
|
Deferred funding
asset
|
3
|
|
82
|
|
-
|
|
82
|
|
-
|
|
|
|
452
|
|
1,379
|
|
1,133
|
|
2,286
|
Loss before
taxes
|
|
|
(315)
|
|
(1,022)
|
|
(650)
|
|
(1,292)
|
|
|
|
|
|
|
|
|
|
|
|
Deferred tax
recovery
|
|
|
(83)
|
|
(258)
|
|
(186)
|
|
(252)
|
|
|
|
|
|
|
|
|
|
|
Net and
comprehensive loss
|
|
$
|
(232)
|
$
|
(764)
|
$
|
(464)
|
$
|
(1,040)
|
|
|
|
|
|
|
|
|
|
|
Net loss per
share
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
(0.46)
|
$
|
(1.52)
|
$
|
(0.92)
|
$
|
(2.07)
|
|
Diluted
|
|
$
|
(0.46)
|
$
|
(1.52)
|
$
|
(0.92)
|
$
|
(2.07)
|
Weighted average
shares outstanding (millions)
|
|
|
|
|
|
|
|
|
|
Basic
|
9
|
|
502.3
|
|
502.2
|
|
502.2
|
|
501.9
|
|
Diluted
|
9
|
|
502.3
|
|
502.2
|
|
502.2
|
|
501.9
|
|
See accompanying
notes to the unaudited interim consolidated financial
statements.
|
Penn West
Petroleum Ltd.
Consolidated Statements of Cash Flows
|
|
|
|
|
Three months
ended
September
30
|
Nine months
ended
September
30
|
(CAD millions,
unaudited)
|
Note
|
2016
|
2015
|
2016
|
2015
|
|
|
|
|
|
|
|
|
|
|
Operating
activities
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(232)
|
$
|
(764)
|
$
|
(464)
|
$
|
(1,040)
|
|
Depletion,
depreciation and impairment
|
4,5
|
|
131
|
|
989
|
|
607
|
|
1,344
|
|
Impairment of
goodwill
|
|
|
-
|
|
22
|
|
-
|
|
22
|
|
Gain on
dispositions
|
5
|
|
-
|
|
-
|
|
(39)
|
|
(97)
|
|
Exploration and
evaluation
|
4
|
|
1
|
|
2
|
|
7
|
|
2
|
|
Accretion
|
7
|
|
4
|
|
9
|
|
18
|
|
28
|
|
Deferred tax
recovery
|
|
|
(83)
|
|
(258)
|
|
(186)
|
|
(250)
|
|
Share-based
compensation
|
10
|
|
2
|
|
1
|
|
6
|
|
3
|
|
Restructuring
|
7
|
|
106
|
|
-
|
|
108
|
|
-
|
|
Unrealized risk
management loss (gain)
|
8
|
|
2
|
|
(76)
|
|
111
|
|
(1)
|
|
Unrealized foreign
exchange loss (gain)
|
6
|
|
(94)
|
|
89
|
|
(235)
|
|
162
|
|
Deferred funding
asset
|
3
|
|
82
|
|
-
|
|
82
|
|
-
|
|
Decommissioning
expenditures
|
7
|
|
(1)
|
|
(9)
|
|
(5)
|
|
(25)
|
|
Change in non-cash
working capital
|
|
|
(16)
|
|
54
|
|
(103)
|
|
-
|
|
|
|
(98)
|
|
59
|
|
(93)
|
|
148
|
Investing
activities
|
|
|
|
|
|
|
|
|
|
|
Capital
expenditures
|
5
|
|
(13)
|
|
(116)
|
|
(32)
|
|
(371)
|
|
Property
dispositions, net
|
|
|
76
|
|
(1)
|
|
1,401
|
|
411
|
|
Change in non-cash
working capital
|
|
|
6
|
|
20
|
|
(40)
|
|
(123)
|
|
|
|
69
|
|
(97)
|
|
1,329
|
|
(83)
|
Financing
activities
|
|
|
|
|
|
|
|
|
|
|
Increase (decrease)
in long-term debt
|
6
|
|
(7)
|
|
23
|
|
(127)
|
|
507
|
|
Repayments of senior
notes
|
6
|
|
(634)
|
|
(84)
|
|
(814)
|
|
(664)
|
|
Realized foreign
exchange loss on repayments
|
6
|
|
113
|
|
15
|
|
149
|
|
95
|
|
Issue of
equity
|
9
|
|
1
|
|
-
|
|
1
|
|
-
|
|
Dividends
paid
|
|
|
-
|
|
(5)
|
|
-
|
|
(70)
|
|
|
|
(527)
|
|
(51)
|
|
(791)
|
|
(132)
|
|
|
|
|
|
|
|
|
|
|
Change in
cash
|
|
|
(556)
|
|
(89)
|
|
445
|
|
(67)
|
Cash, beginning of
period
|
|
|
1,003
|
|
89
|
|
2
|
|
67
|
Cash, end of
period
|
|
$
|
447
|
$
|
-
|
$
|
447
|
$
|
-
|
|
See accompanying
notes to the unaudited interim consolidated financial
statements.
|
Penn West
Petroleum Ltd.
Statements of Changes in Shareholders' Equity
|
|
|
|
|
|
|
(CAD millions,
unaudited)
|
Note
|
Shareholders'
Capital
|
Other
Reserves
|
Deficit
|
Total
|
|
|
|
|
|
|
|
|
|
|
Balance at January 1,
2016
|
|
$
|
8,994
|
$
|
92
|
$
|
(6,151)
|
$
|
2,935
|
Net and comprehensive
loss
|
|
|
-
|
|
-
|
|
(464)
|
|
(464)
|
Share-based
compensation
|
10
|
|
-
|
|
6
|
|
-
|
|
6
|
Issue on exercise of
options
|
9
|
|
2
|
|
(1)
|
|
-
|
|
1
|
Balance at
September 30, 2016
|
|
$
|
8,996
|
$
|
97
|
$
|
(6,615)
|
$
|
2,478
|
|
|
|
|
|
|
|
|
|
|
Note
|
Shareholders'
Capital
|
Other
Reserves
|
Deficit
|
Total
|
(CAD millions,
unaudited)
|
|
|
|
|
|
|
|
|
|
|
Balance at January 1,
2015
|
|
$
|
8,983
|
$
|
89
|
$
|
(3,490)
|
$
|
5,582
|
Net and comprehensive
loss
|
|
|
-
|
|
-
|
|
(1,040)
|
|
(1,040)
|
Share-based
compensation
|
10
|
|
-
|
|
3
|
|
-
|
|
3
|
Issued to dividend
reinvestment plan
|
9
|
|
10
|
|
-
|
|
-
|
|
10
|
Dividends
declared
|
9
|
|
-
|
|
-
|
|
(15)
|
|
(15)
|
Balance at September
30, 2015
|
|
$
|
8,993
|
$
|
92
|
$
|
(4,545)
|
$
|
4,540
|
|
See accompanying
notes to the unaudited interim consolidated financial
statements.
|
Notes to the Unaudited Consolidated Financial
Statements
(All tabular amounts are in CAD millions except
numbers of common shares, per share amounts,
percentages and various figures in Note 8)
1. Structure of Penn West
Penn West Petroleum Ltd. ("Penn West" or the
"Company") is an exploration and production company and is governed
by the laws of the Province of Alberta,
Canada. The Company operates in one segment, to explore for,
develop and hold interests in oil and natural gas properties and
related production infrastructure in the Western Canada Sedimentary
Basin directly and through investments in securities of
subsidiaries holding such interests. Penn West's portfolio of
assets is managed at an enterprise level, rather than by separate
operating segments or business units. The Company assesses its
financial performance at the enterprise level and resource
allocation decisions are made on a project basis across Penn West's
portfolio of assets, without regard to the geographic location of
projects. Penn West owns the petroleum and natural gas
assets or 100 percent of the equity, directly or indirectly, of the
entities that carry on the remainder of the oil and natural gas
business of Penn West, except for an unincorporated joint
arrangement (the "Peace River Oil Partnership") in which Penn
West's wholly owned subsidiaries hold a 55 percent interest.
Penn West operates under the trade names of Penn
West and Penn West Exploration.
2. Basis of presentation and statement of compliance
a) Basis of Presentation
The interim consolidated financial statements
include the accounts of Penn West, its wholly owned subsidiaries
and its proportionate interest in partnerships. Results from
acquired properties are included in Penn West's reported results
subsequent to the closing date and results from properties sold are
included until the closing date.
All intercompany balances, transactions, income
and expenses are eliminated on consolidation.
Certain comparative figures have been
reclassified to correspond with current period presentation.
b) Statement of Compliance
These unaudited condensed interim consolidated
financial statements ("interim consolidated financial statements")
are prepared in compliance with IAS 34 "Interim Financial
Reporting" and accordingly do not contain all of the disclosures
included in Penn West's annual audited consolidated financial
statements.
The interim consolidated financial statements
were prepared using the same accounting policies, critical
accounting judgments and key estimates as in the annual
consolidated financial statements as at and for the year ended
December 31, 2015.
All tabular amounts are in millions of Canadian
dollars, except numbers of common shares, per share amounts,
percentages and other figures as noted.
The interim consolidated financial statements
were approved for issuance by the Board of Directors on
November 1, 2016.
3. Deferred funding assets
Deferred funding amounts relate to Penn West's
share of capital and operating expenses to be funded by Penn West's
partner in the Peace River Oil Partnership and Penn West's share of
capital expenditures to be funded by Penn West's partner in the
Cordova Joint Venture. Amounts expected to be settled within the
next 12 months are classified as current.
|
September 30,
2016
|
December 31,
2015
|
Peace River Oil
Partnership
|
$
|
104
|
$
|
149
|
Cordova Joint
Venture
|
|
-
|
|
82
|
Total
|
$
|
104
|
$
|
231
|
|
|
|
|
|
Current
portion
|
$
|
75
|
$
|
63
|
Long-term
portion
|
|
29
|
|
168
|
Total
|
$
|
104
|
$
|
231
|
During the third quarter of 2016, the Company
impaired the deferred funding asset related to the Cordova Joint
Venture located in British
Columbia as it no longer has future plans for development in
the area.
4. Exploration and evaluation ("E&E") assets
|
Nine months
ended
September 30, 2016
|
Year ended
December 31,
2015
|
Balance, beginning of
period
|
$
|
243
|
$
|
505
|
Capital
expenditures
|
|
-
|
|
10
|
Expense
|
|
(7)
|
|
(7)
|
Impairment
|
|
(89)
|
|
(252)
|
Transfers to
PP&E
|
|
(1)
|
|
(13)
|
Balance, end of
period
|
$
|
146
|
$
|
243
|
During the third quarter of 2016, the Company
impaired certain natural gas properties located within British Columbia as it no longer has future
plans for development in this area. The Company plans to focus on
its core areas in the Cardium, Viking and Peace
River all within Alberta.
The E&E impairment recorded during the period totaled
$37 million ($51 million before-tax).
During the first quarter of 2016, the Company
entered into signed sales agreements to dispose of certain
properties and recorded a $27 million
E&E impairment ($38 million
before-tax) as a result of classifying certain assets as assets
held for sale. These transactions subsequently closed in
April 2016.
5. Property, plant and equipment ("PP&E")
Cost
|
Nine months
ended
September 30, 2016
|
Year ended
December 31,
2015
|
Balance, beginning of
period
|
$
|
16,210
|
$
|
17,456
|
Capital
expenditures
|
|
32
|
|
460
|
Joint venture,
carried capital
|
|
23
|
|
31
|
Acquisitions
|
|
-
|
|
7
|
Dispositions
|
|
(5,008)
|
|
(1,539)
|
Transfers from
E&E
|
|
1
|
|
13
|
SR&ED tax
credits
|
|
(3)
|
|
(29)
|
Net decommissioning
dispositions
|
|
(200)
|
|
(189)
|
Balance, end of
period
|
$
|
11,055
|
$
|
16,210
|
|
|
|
|
|
|
|
|
|
Accumulated
depletion and depreciation
|
Nine months
ended
September 30, 2016
|
Year ended
December 31,
2015
|
Balance, beginning of
period
|
$
|
11,065
|
$
|
9,550
|
Depletion and
depreciation
|
|
295
|
|
667
|
Impairments
|
|
223
|
|
1,700
|
Dispositions
|
|
(3,646)
|
|
(852)
|
Balance, end of
period
|
$
|
7,937
|
$
|
11,065
|
|
|
|
|
|
|
|
|
|
Net book
value
|
September 30,
2016
|
December 31,
2015
|
Total
|
$
|
3,118
|
$
|
5,145
|
|
|
|
|
|
The Company made significant progress on its
asset disposition initiatives during 2016 as it closed its
Saskatchewan Viking disposition for total proceeds of approximately
$975 million and its Slave Point
properties for total proceeds of approximately $148 million, both subject to closing
adjustments. Additionally, a number of minor, non-core property
dispositions were closed during the year. In 2016, Penn West
recorded gains on dispositions of $30
million (2015 - $94 million),
which included $9 million of
transaction costs, primarily related to advisory fees (2015 -
$3 million).
During the third quarter of 2016, the Company
recorded $13 million of PP&E
impairment ($18 million before-tax)
on certain natural gas properties located in British Columbia as they were recorded at the
lesser of fair value less costs to sell and their carrying
amount.
In the second quarter of 2016, the Company
recorded $81 million of PP&E
impairment ($111 million before-tax)
as a result of classifying certain assets as assets held for sale.
This value was based on the proceeds from signed sales agreements
that the Company entered into during July
2016, which subsequently closed during the third quarter of
2016. In the first quarter of 2016, the Company entered into signed
sales agreements to dispose of certain properties and recorded a
$69 million PP&E impairment
($94 million before-tax) as a result
of classifying certain assets as assets held for sale. These
transactions subsequently closed in April
2016.
Impairments have been recorded as Depletion,
Depreciation and Impairment on the Statement of Loss.
6. Long-term debt
|
Amount
(millions)
|
Maturity
dates
|
Average
interest
rate (1)
|
September 30,
2016
|
December 31,
2015
|
2007 Notes
|
US$92
|
2017 –
2022
|
6.86%
|
$
|
121
|
$
|
268
|
2008 Notes
|
US$103,
CAD$14
|
2018 –
2020
|
7.30%
|
|
149
|
|
492
|
UK Notes
|
£16
|
2018
|
6.95%
(2)
|
|
27
|
|
71
|
2009 Notes
|
US$20 (3),
£7, €3
|
2019
|
9.83%
(4)
|
|
42
|
|
126
|
2010 Q1
Notes
|
US$71
|
2017 –
2025
|
6.68%
|
|
93
|
|
205
|
2010 Q4
Notes
|
US$58,
CAD$13
|
2017 –
2025
|
5.94%
|
|
89
|
|
195
|
2011 Notes
|
US$36,
CAD$8
|
2016 –
2021
|
5.49%
|
|
55
|
|
121
|
Total senior secured
notes
|
|
|
576
|
|
1,478
|
Syndicated bank
facility advances
|
|
|
336
|
|
462
|
Total long-term
debt
|
|
$
|
912
|
$
|
1,940
|
|
|
|
|
|
|
Current
portion
|
|
$
|
469
|
$
|
222
|
Long-term
portion
|
|
$
|
443
|
$
|
1,718
|
|
|
(1)
|
Average interest rate
can fluctuate based on debt to EBITDA ratio which expires on March
30, 2017, the date the covenant relief period ends with the bank
syndicate and noteholders.
|
(2)
|
These notes currently
bear interest at 7.95 percent in Pounds Sterling, however,
contracts were entered to fix the interest rate at 6.95 percent in
Canadian dollars and to fix the exchange rate on the repayment
(refer to Note 8).
|
(3)
|
A portion of the 2009
Notes have equal repayments, which began in 2013 with a repayment
of US$5 million, and extend over the remaining years.
|
(4)
|
The Company entered
into contracts to fix the interest rate on the Pounds Sterling and
Euro tranches, at 10.15 percent and 10.22 percent, to 9.15 percent
and 9.22 percent, respectively, and to fix the exchange rate on
repayment (refer to Note 8).
|
In the first nine months of 2016, the Company
prepaid senior notes in aggregate of $627
million (2015 - $358 million)
and a total of $340 million (2015 –
$56 million) of indebtedness was
repaid under the Company's syndicated bank facility.
In September 2016,
the Company offered an additional $448
million of net proceeds received from dispositions during
the year for prepayment of outstanding senior notes. The offer to
holders of the Company's senior notes was substantially accepted
and $437 million was subsequently
prepaid in October 2016. The
remaining $11 million was used to
repay indebtedness on the Company's syndicated bank facility.
Including the payments in October, in 2016 the
Company has completed prepayments to its lenders totalling
$1,415 million (2015 - $414 million) which includes prepayments of
senior notes of $1,064 million (2015
- $358 million) and repayments of
indebtedness under the Company's syndicated bank facility of
$351 million (2015 – $56 million).
Additionally, during 2016 Penn West repaid senior
notes in an aggregate of US$141
million (2015 - US$193 million
and CAD$50 million) as part of normal
course maturities.
There were no senior note issuances in either
2016 or 2015.
Additional information on Penn West's senior
notes is as follows:
|
September 30,
2016
|
December 31,
2015
|
Weighted average
remaining life (years)
|
|
2.7
|
|
3.1
|
Weighted average
interest rate (1)
|
|
6.9%
|
|
7.6%
|
|
(1)
Includes the effect of cross currency swaps (refer to Note
8).
|
At September 30,
2016, the Company had a secured, revolving syndicated bank
facility with an aggregate borrowing limit of $1.2 billion maturing on May 6, 2019. The syndicated bank facility
contains provisions for stamping fees on bankers' acceptances and
LIBOR loans and standby fees on unutilized credit lines that vary
depending on certain financial ratios. At September 30, 2016, the Company had $848 million of unused credit capacity
available.
Drawings on the Company's bank facility are
subject to fluctuations in short-term money market rates as they
are generally held as short-term borrowings. At September 30, 2016, 37 percent (December 31, 2015 – 24 percent) of Penn West's
long-term debt instruments were exposed to changes in short-term
interest rates.
At September 30,
2016, letters of credit totalled $16
million (December 31, 2015 –
$49 million). Letters of credit
reduce the available borrowing capacity under the syndicated bank
facility.
Penn West records unrealized foreign exchange
gains or losses on its senior notes as amounts are translated into
Canadian dollars at the rate of exchange in effect at the balance
sheet. The split between realized and unrealized foreign exchange
is as follows:
|
Three months
ended
September
30
|
Nine months
ended
September
30
|
|
2016
|
2015
|
2016
|
2015
|
Realized foreign
exchange loss on debt maturities
|
$
|
-
|
$
|
-
|
$
|
(36)
|
$
|
(36)
|
Realized foreign
exchange loss on debt pre-payments
|
(113)
|
(15)
|
(113)
|
(59)
|
Unrealized foreign
exchange gain (loss)
|
94
|
(89)
|
235
|
(162)
|
Foreign exchange gain
(loss)
|
$
|
(19)
|
$
|
(104)
|
$
|
86
|
$
|
(257)
|
The Company is subject to certain financial
covenants under its syndicated bank facility and senior notes.
These types of financial covenants are typical for senior lending
arrangements and include senior debt and total debt to EBITDA and
Senior Debt and Total Debt to Capitalization, as more specifically
defined in the applicable lending agreements. At September 30, 2016, the Company was in compliance
with all of its financial covenants under such lending
agreements.
In May 2015, the
Company finalized amending agreements with the lenders under its
syndicated bank facility and with the holders of its senior notes
to, among other things, amend its financial covenants as
follows:
- the maximum Senior Debt to EBITDA and Total Debt to EBITDA
ratio will be less than or equal to 5:1 for the period January 1, 2015 through and including
June 30, 2016, decreasing to less
than or equal to 4.5:1 for the quarter ending September 30, 2016 and decreasing to less than or
equal to 4:1 for the quarter ending December
31, 2016;
- the Senior Debt to EBITDA ratio will decrease to less than or
equal to 3:1 for the period from and after January 1, 2017; and
- the Total Debt to EBITDA ratio will remain at less than or
equal to 4:1 for all periods after September
30, 2016.
The Company also agreed to the following:
- to temporarily grant floating charge security over all of its
property in favor of the lenders and the noteholders on a pari
passu basis, which security will be fully released upon the Company
achieving both (i) a Senior Debt to EBITDA ratio of 3:1 or less for
four consecutive quarters, and (ii) an investment grade rating on
its senior secured debt;
- to cancel the $500 million
tranche of the Company's existing $1.7
billion syndicated bank facility that was set to expire on
June 30, 2016, the remaining
$1.2 billion tranche of the
syndicated bank facility remains available to the Company in
accordance with the terms of the agreements governing such
facility;
- to temporarily reduce its quarterly dividend commencing in the
first quarter of 2015 to $0.01 per
share or less until the earlier of (i) the Senior Debt to EBITDA
being less than 3:1 for two consecutive quarters ending on or after
September 30, 2015, and (ii)
March 30, 2017; and
- until March 30, 2017, to use net
proceeds from any asset dispositions to repay at par $650 million of the outstanding principal amounts
owing to noteholders, with corresponding pro rata amounts from such
asset dispositions to be used to repay any outstanding amounts
drawn under its syndicated bank facility. In 2015 and 2016, the
Company closed $2.2 billion in asset
dispositions and these proceeds were used for debt prepayments to
its noteholders and syndicated bank facility. As the Company
reached the threshold of $650 million
in 2015, additional repayments to lenders are at the discretion of
the Company.
7. Provisions
|
September 30,
2016
|
December 31,
2015
|
Decommissioning
liability
|
$
|
210
|
$
|
397
|
Office lease
provision
|
|
108
|
|
-
|
Total
|
$
|
318
|
$
|
397
|
|
|
|
|
|
Current
portion
|
$
|
36
|
$
|
21
|
Long-term
portion
|
|
282
|
|
376
|
Total
|
$
|
318
|
$
|
397
|
Decommissioning liability
The decommissioning liability was determined by
applying an inflation factor of 2.0 percent (December 31, 2015 – 2.0 percent) and the inflated
amount was discounted using a credit-adjusted rate of 7.5 percent
(December 31, 2015 – 7.5 percent)
over the expected useful life of the underlying assets, currently
extending over 50 years into the future.
Changes to the decommissioning liability were as follows:
|
Nine months ended
September 30,
2016
|
Year
ended
December 31,
2015
|
Balance, beginning of
period
|
$
|
397
|
$
|
585
|
Net liabilities
disposed (1)
|
|
(186)
|
|
(61)
|
Decrease in provision
due to change in estimate
|
(14)
|
|
(128)
|
Liabilities
settled
|
|
(5)
|
|
(36)
|
Accretion
charges
|
|
18
|
|
37
|
Balance, end of
period
|
$
|
210
|
$
|
397
|
|
|
|
|
|
Current
portion
|
$
|
21
|
$
|
21
|
Long-term
portion
|
$
|
189
|
$
|
376
|
|
(1)
Includes additions from drilling activity, facility capital
spending and disposals related to net property
dispositions.
|
Office lease provision
Due to the Company closing several significant
asset dispositions in 2016 which reduced the size of its
operations, Penn West recognized a provision related to certain
office lease commitments as these are considered to be onerous
contracts. The provision totaled $108
million (2015 – nil) and represents the present value of the
future lease payments that the Company is obligated to make under
non-cancellable lease contracts less recoveries under current
sub-lease agreements. The cash flows have been discounted using
Penn West's credit-adjusted rate of 7.5 percent. This estimate may
vary as a result of future changes in estimated recoveries.
At September 30,
2016, $15 million was
classified as current (December 31,
2015 – nil) and $93 million
has been classified as non-current (December
31, 2015 – nil).
8. Risk management
Financial instruments consist of accounts
receivable, fair values of derivative financial instruments,
accounts payable and accrued liabilities, dividends payable and
long-term debt. Except for the senior notes described in Note 6,
the fair values of these financial instruments approximate their
carrying amounts due to the short-term maturity of the instruments,
the mark to market values recorded for the financial instruments
and the market rate of interest applicable to the syndicated bank
facility. At September 30, 2016, the
estimated fair values of the principal and interest obligations of
the outstanding notes totalled $523
million (December 31, 2015 –
$1.4 billion) compared to the
carrying value of $576 million
(December 31, 2015 – $1.5 billion).
The fair values of all outstanding financial,
commodity, power, interest rate and foreign exchange contracts are
reflected on the balance sheet with the changes during the period
recorded in income as unrealized gains or losses.
As at September 30,
2016 and December 31, 2015,
the only asset or liability measured at fair value on a recurring
basis was the risk management asset and liability, which was valued
based on "Level 2 inputs" being quoted prices in markets that are
not active or based on prices that are observable for the asset or
liability.
The following table reconciles the changes in the
fair value of financial instruments outstanding:
Risk management asset
(liability)
|
Nine months
ended
September 30,
2016
|
Year ended
December 31,
2015
|
Balance, beginning of
period
|
$
|
104
|
$
|
114
|
Unrealized gain
(loss) on financial instruments:
|
|
|
|
|
|
Commodity collars,
swaps and assignments
|
|
(41)
|
|
13
|
|
Electricity
swaps
|
|
2
|
|
6
|
|
Foreign exchange
forwards
|
|
(43)
|
|
(47)
|
|
Cross currency
swaps
|
|
(29)
|
|
18
|
Total fair value, end
of period
|
$
|
(7)
|
$
|
104
|
Penn West had the following financial instruments
outstanding as at September 30, 2016.
Fair values are determined using external counterparty information,
which is compared to observable market data. Penn West limits its
credit risk by executing counterparty risk procedures which include
transacting only with institutions within Penn West's syndicated
bank facility or companies with high credit ratings and by
obtaining financial security in certain circumstances.
|
Notional
volume
|
Remaining
Term
|
Pricing
|
Fair value
(millions)
|
Natural
gas
|
|
|
|
|
|
|
AECO Swaps
|
14,000
mcf/d
|
Oct/16 –
Dec/16
|
$3.05/mcf
|
$
|
1
|
|
AECO Swaps
|
4,700
mcf/d
|
Oct/16 –
Dec/16
|
$2.69/mcf
|
|
-
|
|
AECO Swaps
|
15,000
mcf/d
|
Jan/17 –
Mar/17
|
$3.03/mcf
|
|
-
|
|
AECO Swaps
|
13,200
mcf/d
|
Apr/17 –
Jun/17
|
$2.70/mcf
|
|
-
|
|
AECO Swaps
|
11,300
mcf/d
|
Jul/17 –
Sep/17
|
$2.71/mcf
|
|
-
|
|
AECO Swaps
|
9,400
mcf/d
|
Oct/17 –
Dec/17
|
$3.00/mcf
|
|
-
|
|
AECO Swaps
|
1,900
mcf/d
|
Jan/17 –
Dec/17
|
$2.92/mcf
|
|
-
|
|
AECO Swaps
|
3,800
mcf/d
|
Jan/18 –
Dec/18
|
$2.89/mcf
|
|
-
|
|
|
|
|
|
|
Crude
Oil
|
|
|
|
|
|
|
WTI Swaps
|
3,000
bbl/d
|
Oct/16 –
Dec/16
|
$64.58/bbl
|
|
-
|
|
WTI Swaps
|
5,000
bbl/d
|
Oct/16 –
Dec/16
|
$72.08/bbl
|
|
5
|
|
WTI Swaps
|
3,000
bbl/d
|
Jan/17 –
Mar/17
|
$69.37/bbl
|
|
1
|
|
WTI Swaps
|
3,500
bbl/d
|
Jan/17 –
Dec/17
|
$66.07/bbl
|
|
(1)
|
Electricity
swaps
|
|
|
|
|
|
|
Alberta Power
Pool
|
25 MW
|
Oct/16 –
Dec/16
|
$49.90/MWh
|
|
(2)
|
|
|
|
|
|
|
Foreign exchange
forwards on senior notes
|
|
|
|
|
3 to 15-year initial
term
|
US$25
|
2017
|
1.000
CAD/USD
|
|
8
|
Cross currency
swaps
|
|
|
|
|
|
10-year initial
term
|
£57
|
2018
|
2.0075 CAD/GBP,
6.95%
|
|
(17)
|
|
10-year initial
term
|
£20
|
2019
|
1.8051 CAD/GBP,
9.15%
|
|
(1)
|
|
10-year initial
term
|
€10
|
2019
|
1.5870 CAD/EUR,
9.22%
|
|
(1)
|
|
|
|
|
|
|
Total
|
|
|
|
$
|
(7)
|
Based on September 30,
2016 pricing, a $1.00 change
in the price per barrel of liquids would have changed pre-tax
unrealized risk management by $3
million and a $0.10 change in
the price per mcf of natural gas would change pre-tax unrealized
risk management by $1 million.
The components of risk management on the
Statement of Loss are as follows:
|
Three months
ended
September
30
|
Nine months
ended
September
30
|
|
2016
|
2015
|
2016
|
2015
|
Realized
|
|
|
|
|
|
Settlement of
commodity contracts/assignment
|
$
|
21
|
$
|
22
|
$
|
84
|
$
|
29
|
|
Monetization of
commodity contracts
|
-
|
-
|
2
|
18
|
|
Settlement of foreign
exchange contracts
|
9
|
6
|
3
|
31
|
|
Monetization of
foreign exchange contracts
|
-
|
-
|
32
|
63
|
Total realized risk
management gain
|
30
|
28
|
121
|
141
|
|
|
|
|
|
Unrealized
|
|
|
|
|
|
Commodity
contracts
|
(5)
|
48
|
(41)
|
6
|
|
Electricity
swaps
|
-
|
(3)
|
2
|
4
|
|
Crude oil
assignment
|
-
|
4
|
-
|
(3)
|
|
Foreign exchange
contracts
|
4
|
20
|
(43)
|
(23)
|
|
Cross-currency
swaps
|
(1)
|
7
|
(29)
|
17
|
Total unrealized risk
management gain (loss)
|
(2)
|
76
|
(111)
|
1
|
Risk management
gain
|
$
|
28
|
$
|
104
|
$
|
10
|
$
|
142
|
Operating costs for the third quarter of 2016
included a realized loss of $1
million (2015 – $6 million)
and for the nine months ended September 30,
2016 included a realized loss of $5
million (2015 – $10 million)
on electricity contracts.
Market risks
Penn West is exposed to normal market risks
inherent in the oil and natural gas business, including, but not
limited to, commodity price risk, foreign currency rate risk,
credit risk, interest rate risk and liquidity risk. The Company
seeks to mitigate these risks through various business processes
and management controls and from time to time by using financial
instruments.
There have been no significant changes to these
risks from those discussed in Penn West's annual audited
consolidated financial statements.
Foreign currency rate risk
In 2016, the Company monetized a total of
US$115 million of foreign exchange
forward contracts on senior notes. At September 30, 2016, the following foreign
currency forward contracts were outstanding:
Nominal
Amount
|
Settlement
date
|
Exchange
rate
|
Buy US$25
|
2017
|
1.000
CAD/USD
|
9. Shareholders' equity
i) Issued
Shareholders'
capital
|
Common
Shares
|
Amount
|
Balance, January 1,
2015
|
497,320,087
|
$
|
8,983
|
Issued on exercise of
equity compensation plans (1)
|
-
|
|
1
|
Issued to dividend
reinvestment plan
|
4,843,076
|
|
10
|
Balance, December 31,
2015
|
502,163,163
|
|
8,994
|
Issued on exercise of
equity compensation plans (1)
|
381,000
|
|
2
|
Cancellation of
dividend reinvestment plan (2)
|
(175)
|
|
-
|
Balance, September
30, 2016
|
502,543,988
|
$
|
8,996
|
|
(1)
Upon exercise of options, the net benefit is recorded as a
reduction of other reserves and an increase to shareholders'
capital.
|
(2)
In March 2016, the Company cancelled its dividend reinvestment
plan.
|
ii) Earnings per share - Basic and
Diluted
The weighted average number of shares used to
calculate per share amounts was as follows:
|
Three months
ended
September
30
|
Nine months
ended
September
30
|
Average shares
outstanding (millions)
|
2016
|
2015
|
2016
|
2015
|
|
Basic and
Diluted
|
502.3
|
502.2
|
502.2
|
501.9
|
For the third quarter of 2016, 10.7 million
shares (2015 – 16.1 million) that would be issued under the Stock
Option Plan ("Option Plan") were excluded in calculating the
weighted average number of diluted shares outstanding as they were
considered anti-dilutive.
For the first nine months of 2016, 10.7 million
shares (2015 – 16.1 million) that would be issued under the Option
Plan were excluded in calculating the weighted average number of
diluted shares outstanding as they were considered
anti-dilutive.
10. Share-based compensation
Stock Option Plan
Penn West has an Option Plan that allows Penn
West to issue options to acquire common shares to officers,
employees and other service providers.
Under the terms of the plan the number of options
reserved for issuance under the Option Plan shall not exceed 4.25
percent of the aggregate number of issued and outstanding common
shares of Penn West. The grant price of options is equal to the
volume-weighted average trading price of the common shares on the
TSX for a five-trading-day period immediately preceding the date of
grant. Options granted to date vest over a four-year period and
expire five years after the date of grant.
|
Nine months
ended
September 30,
2016
|
Year ended
December 31,
2015
|
Options
|
Number
of Options
|
Weighted
Average
Exercise
Price
|
Number
of Options
|
Weighted
Average Exercise
Price
|
Outstanding,
beginning of period
|
10,595,728
|
$
|
10.21
|
14,460,158
|
$
|
13.91
|
Granted
|
3,557,250
|
|
1.20
|
5,122,600
|
|
1.85
|
Exercised
|
(381,000)
|
|
1.38
|
-
|
|
-
|
Forfeited/
Expired
|
(3,116,103)
|
|
15.05
|
(8,987,030)
|
|
11.39
|
Outstanding, end of
period
|
10,655,875
|
$
|
6.11
|
10,595,728
|
$
|
10.21
|
Exercisable, end of
period
|
4,003,863
|
$
|
10.89
|
3,907,426
|
$
|
17.21
|
A Black-Scholes option-pricing model was used to
determine the fair value of options granted under the Option Plan
with the following fair value per option and weighted average
assumptions:
|
Nine months ended
September 30
|
|
2016
|
2015
|
Average fair value of
options granted (per share)
|
$
|
0.54
|
$
|
0.63
|
Expected life of
options (years)
|
|
4.0
|
|
4.0
|
Expected volatility
(average)
|
|
61.0%
|
|
43.6%
|
Risk-free rate of
return (average)
|
|
0.6%
|
|
0.6%
|
Dividend
yield
|
|
nil
|
|
2.0%
|
Restricted Share Unit ("RSU") plan
Penn West has a RSU plan whereby Penn West
employees receive consideration that fluctuates based on Penn
West's share price on the TSX. Eligible employees receive a grant
of a specific number of units (each of which notionally represents
a common share) that vest over a three-year period. In March 2016, the Board approved that the
consideration can now be paid in either cash or shares at their
discretion on new grants. The Company believes that future
consideration will be in the form of shares purchased on the open
market at prevailing market prices. Consideration on all previous
grants prior to March 2016 will
continue to be paid in cash.
If the service requirements are met, the cash
consideration paid is based on the number of units vested and the
five-day weighted average trading price of the common shares prior
to the vesting date plus dividends declared by Penn West during the
period preceding the vesting date. If the consideration is provided
in shares, each outstanding RSU would be exchanged for one common
share.
As consideration can now be in the form of cash
or shares, all grants subsequent to March
2016 will be accounted for based on the equity method.
RSU
plan
(number of shares
equivalent)
|
Nine months
ended
September 30,
2016
|
Year ended
December 31, 2015
|
Outstanding,
beginning of period
|
6,325,954
|
3,166,476
|
Granted
|
11,402,290
|
9,156,290
|
Vested
|
(2,285,935)
|
(1,281,077)
|
Forfeited
|
(4,158,967)
|
(4,715,735)
|
Outstanding, end of
period
|
11,283,342
|
6,325,954
|
|
|
|
Outstanding –
liability method
|
2,652,202
|
6,325,954
|
Outstanding – equity
method
|
8,631,140
|
-
|
The fair value of the RSU plan units under the
equity method used the following weighted average assumptions:
|
Nine months ended
September 30
|
|
2016
|
2015
|
Average fair value of
units granted (per unit)
|
$
|
1.21
|
$
|
-
|
Expected life of
units (years)
|
|
3.0
|
|
-
|
Expected forfeiture
rate
|
|
18.9%
|
|
-
|
At September 30,
2016, RSU plan obligations of $2
million were classified as a current liability (December 31, 2015 – $3
million) included in accounts payable and accrued
liabilities and $2 million was
classified as a non-current liability (December 31, 2015 – $2
million) included in other non-current liabilities.
Deferred Share Unit ("DSU") plan
The DSU plan allows Penn West to grant DSUs in
lieu of cash fees to non-employee directors providing a right to
receive, upon retirement, a cash payment based on the
volume-weighted-average trading price of the common shares on the
TSX for the five trading days immediately prior to the day of
payment. Management directors are not eligible to participate in
the DSU plan. At September 30, 2016,
700,851 DSUs (December 31, 2015 –
457,398) were outstanding and $1
million was recorded as a current liability (December 31, 2015 – $1
million).
Performance Share Unit ("PSU") plan
The PSU plan allows Penn West to grant PSUs to
employees of Penn West. Upon meeting the vesting conditions, the
employee could receive a cash payment based on performance factors
determined by the Board of Directors and the share price. Members
of the Board of Directors are not eligible for the PSU Plan.
PSU awards (number
of shares equivalent)
|
Nine months
ended
September 30,
2016
|
Year ended
December 31, 2015
|
Outstanding,
beginning of period
|
1,622,881
|
771,020
|
Granted
|
2,316,000
|
1,483,000
|
Vested
|
(199,844)
|
(294,567)
|
Forfeited
|
(391,037)
|
(336,572)
|
Outstanding, end of
period
|
3,348,000
|
1,622,881
|
The PSU obligation is classified as a liability
due to the cash settlement feature. The change in the fair value of
outstanding PSU awards is charged to income based on the common
share price at the end of each reporting period plus accumulated
dividends multiplied by a performance factor determined by the
Board of Directors. At September 30,
2016, $1 million was
classified as a current liability (December
31, 2015 – nil) and included in accounts payable and accrued
liabilities and $2 million was
classified as a non-current liability (December 31, 2015 – $1
million) and included in other non-current liabilities.
Share-based compensation
Share-based compensation is based on the fair
value of the options and units at the time of grant under the
Option Plan and RSU plan (equity method), which is amortized over
the remaining vesting period on a graded vesting schedule.
Share-based compensation under the RSU plan (liability method), DSU
and PSU is based on the fair value of the awards outstanding at the
reporting date and is amortized based on a graded vesting schedule.
Share-based compensation consisted of the following:
|
Nine months ended
September 30
|
|
2016
|
2015
|
Options
|
$
|
2
|
$
|
3
|
RSU plan
– liability method
|
|
3
|
|
-
|
RSU plan –
equity method
|
|
4
|
|
-
|
PSU
|
|
2
|
|
-
|
Share-based
compensation
|
$
|
11
|
$
|
3
|
The share price used in the fair value
calculation of the RSU plan (liability method), PSU and DSU
obligations at September 30, 2016 was
$2.35 (September 30, 2015 – $0.60). Share-based compensation related to the
DSU was insignificant in both periods.
Employee retirement savings plan
Penn West has an employee retirement savings plan
(the "savings plan") for the benefit of all employees. Under the
savings plan, employees may elect to contribute up to 10 percent of
their salary and Penn West matches these contributions at a rate of
$1.50 for each $1.00 of employee contribution. Both the
employee's and Penn West's contributions are used to acquire Penn
West common shares or are placed in low-risk investments. Shares
are purchased in the open market at prevailing market prices.
11. Commitments and contingencies
The Company is involved in various litigation and
claims in the normal course of business and records provisions for
claims as required.
In February 2016,
Penn West announced it had entered agreements to settle all class
action proceedings in Canada and
United States against the Company
related to damages alleged to have been incurred due to a decline
in Penn West's share price following the announcement in 2014 that
the Company would need to restate certain of its historical
financial statements and related MD&A. The settlement
agreements provide for a payment of $53
million split evenly between Canadian and US investors that
is fully funded by insurance coverage maintained by Penn
West. As a result, the payment will not impact the Company's
cash or financial position. The proposed settlements have received
required court approval in each of Alberta, Ontario and Quebec and in New
York, and all conditions to settlement have been satisfied.
As a result of the approval of these settlements, there is no
further exposure to the Company.
12. Subsequent event
In September 2016,
the Company offered $448 million of
net proceeds received from dispositions during the year for
prepayment of outstanding senior notes. The offer to holders of the
Company's senior notes was substantially accepted and $437 million was subsequently pre-paid in
October 2016. The remaining
$11 million was used to repay
indebtedness on the Company's syndicated bank facility in
October 2016.
SOURCE Penn West