Penn West Petroleum Ltd. is selling one of its main oil properties as it seeks leniency on conditions tied to its debt, underscoring growing financial strains at the cash-strapped producer.
Penn West said on Monday that it had reached an agreement with an unnamed buyer to sell holdings in the Slave Point area of northern Alberta for $148-million.
It has also signed letters of intent to sell some of its non-core properties for $80-million, bringing expected proceeds from asset sales so far this year to $230-million. The deals are expected to close in the second quarter.
The sales are the latest steps taken by the debt-laden oil producer as its struggles to cope with the collapse in crude prices to under $40 (U.S.) a barrel from more than $100 in mid-2014.
Chief executive officer David Roberts has already shed hundreds of jobs, scrapped the dividend and cut spending to the bone to shore up finances.
Now the company is parting with holdings once viewed as key as it grapples with net debt of about $2-billion (Canadian). It is retaining its positions in Alberta's Viking and Cardium oil zones.
"They have to do something," said Raymond James Ltd. analyst Jeremy McCrea in Calgary. "Slave Point used to be a core asset, but just given where the leverage position is, ultimately they've narrowed the focus down even more."
Since the downturn began, companies have sought to jettison assets to appease jittery lenders while at the same time seeking relaxed terms on various debt obligations.
On Monday, Pacific Exploration and Production Corp. said it would miss a $25.6-million (U.S.) interest payment due later this month. It said it would use a 30-day grace period to negotiate with debt holders to "ensure the long-term viability of the business."
Similarly, Penn West said earlier this month that it anticipates breaching certain provisions tied to its debt by the end of the second quarter, based on the current outlook for future oil prices.
One condition requires its senior debt to be no more than five times its earnings before interest, taxes, depreciation and amortization. The ratio stood at 4.6 times at the end of 2015. Penn West said it is in talks with lenders about possible relief, but offered no assurances that an agreement could be reached.
In a sign of mounting financial strain, the company also said it is assessing options to "address the risk of default," including further sales of assets and hedging positions.
Barclays PLC analysts had expressed doubt prior to Monday's deal over the company's ability to secure additional flexibility, citing strict terms associated with the last time it sought relief.
This time, lenders could force the sale of key holdings in exchange for new concessions, limiting upside as oil prices recover, they said.
"This would see the company forced to sell its crown jewel assets and would severely compromise the opportunity for equity holders over time," analysts led by Grant Hofer wrote in a March 10 note.
Penn West said on Monday that production at Slave Point had been forecast to drop to 3,900 barrels of oil equivalent a day in 2016 from 5,500 barrels last year, in part due to spending reductions.
Despite the sale, chief financial officer David Dyck said in a statement that its Viking and Cardium holdings give it ample room for future growth. The company's 2016 budget is set at $50-million (Canadian), a 90-per-cent reduction from last year, and includes no money for new drilling.
Last year, Penn West raised $800-million from asset sales, despite a sluggish market. However, Mr. McCrea of Raymond James and others said the company may struggle to sell additional properties this year due to a glut of assets on the block.