Penn West sells Saskatchewan and Alberta assets for C$ 1.1bn

Penn West Petroleum Ltd. recently announced that it has entered into a definitive agreement for the sale of all of its Saskatchewan assets, including its Dodsland Viking area, for cash consideration of C$ 975 million, subject to normal closing adjustments. The Saskatchewan assets are split approximately evenly between medium and heavy oil properties in the West and the Dodsland light-oil properties in the East. The purchaser is Teine Energy Ltd., a Viking producer backed by the Canada Pension Plan Investment Board.

This transaction, together with additional Alberta asset dispositions for proceeds of approximatelyC$ 140 million, is expected to close in the second quarter. The total cash consideration from asset dispositions to date in 2016 is approximately C$1.3 billion, reducing our pro forma net debt to approximately C$600 million from CAD2.1 billion at year-end 2015. As a result, the company expects to be comfortably in compliance with all of its financial covenants at the end of the second quarter and the remainder of 2016.

“Saskatchewan is a coveted asset amongst many of our competitors and with this transaction we have capitalized on the demand for high-quality oil assets of scale”,  David Dyck, Senior Vice President and Chief Financial Officer of Penn West commented. “This is a pivotal transaction for the company. While we have made significant progress over the past three years in reducing our total debt, this asset sale results in a markedly improved capital structure and positions the company in the top tier of our peers in terms of all significant debt metrics. Additionally, the sales metrics received are meaningfully above recent precedent transactions in the area and are very accretive to our shareholders.”

The company expects to realize nearly C$100 million annually as a result of decreased interest expenses and significant reductions in G&A expenses through this transaction, which more than offsets the loss in net operating income associated with the Saskatchewan properties.

The following are some of the key metrics and implied transaction multiples for theSaskatchewan properties based on the company’s full year 2016 forecast:

The effective date of the Saskatchewan assets sale is May 1, 2016 and closing is expected to occur in the second quarter, subject to the receipt of all necessary regulatory approvals and the satisfaction of closing conditions customary in transactions of this nature.

In addition to the sale of its Saskatchewan properties and through a series of transactions, Penn West sold other Alberta properties for proceeds of approximately C$140 million with associated 2016 production of 3,100 boe/d. RBC Capital Markets acted as their exclusive financial advisor on these transactions.

The sale of their Saskatchewan assets is a key element of the company’s transformation strategy allowing them to streamline and high-grade the remainder of their portfolio to once again grow reserves, production and funds flow from operations at a profitable and measured pace.

“While the Dodsland Viking was an important contributor to Penn West’s growth profile in recent years, this transaction will allow us to replace these largely mature assets by funding the more prospective and numerous growth opportunities in our Cardium and Alberta Viking positions; areas where we are more focused and more competitive”, commented Dave Roberts, President and Chief Executive Officer of Penn West. “We forecast that the combination of a concentrated asset portfolio, lower operating cost base, and reduced interest expense burden will allow us to grow the company’s production by approximately 10% annually well into the next decade, while still generating funds flow from operations in excess of our capital spending, at current commodity prices.”

“Three years ago Penn West embarked on a path to create the most competitive conventional oil producer in Western Canada. The journey was perhaps longer and more difficult than anyone expected as we have experienced the worst crude oil crash in over a decade. We persevered and we can now see the most challenging time in our company’s history coming to a close. As a result of our actions, we will have reduced debt by overC$2.8 billion in the last three years, dramatically lowered our cost structure and meaningfully improved our operational execution. We are very excited to open a new chapter as our focused Alberta operations will create a top quartile company with a strong and sustainable growth profile, operating costs of C$10-C$12/boe, and low leverage metrics”, concluded Dave Roberts.