Penn West Announces its Financial Results for the Third Quarter Ended September 30, 2014 and Preliminary 2015 Outlook
Nov 5, 2014
CALGARY, Nov. 5, 2014 /CNW/ - PENN WEST PETROLEUM LTD. (TSX - PWT; NYSE - PWE) ("Penn West", the "Company", "we", "us" or "our") is pleased to announce its financial results for the third quarter ended September 30, 2014. All figures are in Canadian dollars unless otherwise stated. Certain comparative figures for the three and nine month periods ended September 30, 2013 are as restated.
Upon reviewing our numbers for the third quarter, I am excited about the continuing progress we are making at Penn West. We delivered average production of 100,839 barrels of oil equivalent per day in the quarter with a 64 percent liquids weighting. In executing our third quarter capital program of $225 million, we drilled 73 net wells and put 39 net wells on production, setting the company up for an improvement in fourth quarter volumes even with a late year closing of our previously announced asset sale. Importantly, the improvements in our operational performance and delivery of production growth has offset this asset sale and allowed us to maintain our 2014 production guidance of 101,000 - 106,000 boe per day - Penn West has turned the corner.
Notably, in the face of commodity price headwinds faced by the industry, we continued to show progress in delivering a strong percentage of funds flow netback per barrel against our realized price in the quarter. Our cost control efforts are taking hold and we expect this trend will continue to improve into 2015. As we have said, our long-term plan has been prepared to position the business for success in a low commodity price environment.
We continue to monitor the macroeconomic and commodity price environment, however, the operational performance that we are seeing from within and testing our business model at the C$70 per barrel level gives us confidence that we can hold our course into 2015 in the current environment. What will guide our investment decisions more than absolute commodity prices, is duration in commodity price weakness. Maximizing capital efficiencies and reliability in the delivery of production requires thoughtful planning and discipline. As a result, our programs for the first half of 2015 have been planned for some time and we would not expect those plans to change. Should we continue to see commodity price weakness (sub C$75 per barrel), through to the second quarter of 2015, we may consider adjusting capital allocations in some of our second half programs. We control over 90 percent of our capital investment allocations and we are committed to continuing to make the right decisions for the long-term value of the Company for our shareholders.
We are excited about our 2015 Capital Budget and look forward to sharing the details of that plan with the market in the third week of November.
On October 23, 2014, Penn West announced that it had signed an agreement to sell non-core assets located in south central Alberta for expected proceeds of approximately $355 million. With closing of this transaction, Penn West will have completed over $1 billion in asset sales since the November 2013 announcement of our long-term plan relative to the low end of our target range of $1.5 billion. Further, as a result of these combined divestments, a favourable commodity price environment early in the year, and strong operational improvements, we will have reduced our debt position by over $1.2 billion during that same period. The Company is now directing its disposition efforts to non-producing assets as we continue to increase the focus on our core areas and improve our financial flexibility.
In a separate press release today, Penn West declared a fourth quarter 2014 dividend of $0.14 per share, consistent with the previous quarter. The pullback in Canadian energy equity prices since early September 2014, against the backdrop of an equally precipitous fall in global crude oil prices during that period, has pushed Penn West's implied yield to over 10 percent. These factors have raised concerns amongst some of our stakeholders about the Company's ability to sustain its dividend.
The Company remains comfortable with its ability to fund its capital expenditure programs in conjunction with paying a dividend and has modelled and assessed its business plan at commodity price levels well below its budget assumptions. On November 17, 2014 the Company will be releasing further details of its 2015 budget and updated long-term plan. The updated long-term plan will provide a renewed vision of growth in both production and profitibility through a continued pursuit of operational discipline, cost control and focused capital programs on Penn West's core areas.
OPERATED DEVELOPMENT ACTIVITY
Third quarter development activities resumed post break-up as expected in the Cardium and Slave Point core areas, while operations in the Viking area of southeast Saskatchewan were somewhat hampered by prolonged wet spring conditions. In our three core light oil areas, Penn West spent approximately $168 million (approximately 75 percent of total capital) and drilled a total of 73 (72.6 net) light oil wells with a success rate of 100 percent. Of these, 48 (48.0 net) wells were drilled in the Viking, 20 (19.6 net) wells were drilled in the Cardium and five (5.0 net) were drilled in the Slave Point. Over 90 percent of all net wells drilled were in our core light oil areas as detailed in Table 1 below.
The table below summarizes the Company's third quarter drilling, completions and tie-in activity:
Table 1: Third Quarter 2014 Core Area Light Oil Development Summary
In the quarter, Penn West invested development capital of $65 million and drilled 20 (19.6 net) wells and brought seven (6.4 net) wells on production. Of the wells drilled in the quarter, 12 (12.0 net) were drilled in Willesden Green, seven (6.7 net) were in Lodgepole, and one (0.9 net) was in Pembina Cardium Unit #9. As planned, the drilling program in the second half of 2014 is featuring more multi-well pads that are expected to provide cost efficiencies and drive incremental cost savings.
Development activities in the Cardium during the third quarter remained on pace to meet full-year targets. Year to date, Penn West has drilled 44 Cardium wells versus a plan of 67 with the remainder expected to be spud in the fourth quarter. The Company currently has five rigs operating in the Cardium, as planned, to complete the 2014 program.
During the Company's second half 2014 program, water flood activities continued in Willesden Green and Pembina and the Company continues to assess the possible expansion of our water flood program in 2015. Waterflood programs throughout the Cardium area are proceeding, consistent with the Company's long-term plan, and are performing in-line with expectations. Over time, the Company expects that these programs will mitigate natural declines and increase the ultimate recovery of light oil resource in our Cardium areas as reservoir pressures are optimized.
During the third quarter of 2014, $59 million of capital was invested in development activities in the Viking area. The pace of drilling increased substantially compared to the first half of the year with 48 wells drilled in the quarter, slightly behind plan due to the prolonged wet conditions in the area. A second rig was brought in early to recover the Company's drilling schedule and by quarter-end, the program was back on track. Year to date, the Viking team has drilled 66 Viking wells of the planned 101, and there is currently one rig operating to complete the remainder of the program in the fourth quarter.
The Company's target is to achieve average per well drilling and completion ("D&C") costs in the Viking area of below $800,000 on a sustainable basis. High industry activity in the area has increased service costs on the completions side of the business by approximately 10 percent. In addition, the Company recovered its schedule from the effects of wet conditions which pushed per well D&C costs marginally higher in the quarter to approximately $870,000 on average. It is important to note that because Penn West is a cost leader in the area, it was able to absorb these excess costs. By quarter-end, per well D&C costs were trending back down toward the Company's best-in-class average in the first half of 2014 of $840,000.
Leveraging off the positive results of its 16 wells-per-section down-spacing program earlier in the year, the Company is continuing to test down-spacing programs across the play. As the largest acreage holder in the core of the Viking play, an expanded down spacing program would significantly increase the existing 400-500 drilling locations the Company currently has estimated.
Penn West continues to test various D&C techniques in the Slave Point Carbonates, as it focuses on optimizing production performance, recoveries, cycle-times and per well costs. The Company invested development capital of $43 million in the third quarter and drilled five (5.0 net) wells in Otter.
In the quarter, the Company's first acid frac stimulation was completed in Sawn. Initial results are encouraging and production performance on the well is equivalent to the Company's tier one type curve in a lesser rock quality part of the reservoir. All planned 2014 drilling operations in the Slave Point area are essentially complete with 19 of the planned 20 wells drilled and one rig nearing completion on the final well in the 2014 program. Development activities for the remainder of the year will be focused on completions and tie-in operations.
As Penn West continues to assess the various techniques employed in both D&C operations, it expects to better understand an optimal and economically competitive strategy in the Slave Point play. The Company now believes its long-term plan target of $4.5 million is achievable utilizing certain of the techniques the Company tested this year. Discipline will be exercised, however, with a view to ensuring recoveries and sustainability of longer-term production performance before significant capital is committed.
The 7-16 horizontal well targeting the Duvernay was spud during the first week of July 2014 as planned. The well was successfully drilled to a measured depth of approximately 5,000 meters and logs were collected over a 1,900 meter lateral section in the well. Completions operations commenced in October 2014 as planned and the well is expected to be on production in December 2014.
During the third quarter of 2014, the Company continued to execute on its planned capital activities with a focus on the Viking and Cardium plays, with 48 and 20 net operated wells drilled, respectively. Additionally, appraisal activities continued in the Slave Point with five net wells drilled. The increase in capital expenditures in the third quarter of 2014 compared to the same period in 2013 was the result of the Company completing a strategy review in 2013 which resulted in the Company cutting back its capital expenditures in the comparative quarter. On a year-to-date basis, improvements in drilling cycle times have led to lower costs as Penn West continues to execute on a number of operational and capital efficiency strategies.
COMMON SHARE DATA
REMEDIATION OF ACCOUNTING PRACTICES UPDATE
Penn West is implementing appropriate remedial measures to strengthen the Company's corporate governance, compliance and control processes. It is in the process of enhancing the Company's internal control testing function with the support of an independent third party firm, the Audit Committee and the Board, allowing for a higher level of independent assurance from this function. We believe that increasing organizational awareness and understanding of the importance of internal controls will significantly decrease the risk of errors in the Company's financial statements.
Senior management is also reinforcing related accounting policies through enhanced formalization of documentation requirements and additional training and procedures across the Company to better ensure compliance with the Company's policies and standards. Senior management will continue to emphasize adherence to these policies on an ongoing basis. During the third quarter of 2014, specific remediation efforts included:
These remediation activities will continue in the coming months.
This outlook section is included to provide shareholders with information about the Company's expectations as at November 4, 2014 for production and capital budget in 2014 and 2015 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 our actual capital expenditures and production performance for 2014 and 2015, including our non-core asset disposition program.
There have been no changes to the Company's guidance for its 2014 forecast average production of 101,000 to 106,000 boe per day, as discussed in the President's Message above and as originally disclosed in our January 21, 2014 press release entitled "Penn West Provides Fourth Quarter 2013 Operational Update and Announces Additional Non-Core Asset Dispositions for Expected Proceeds of Approximately $175 Million." Our capital budget also remains stable at $820 million, as outlined in our second quarter 2014 financial results press release.
The Company previously forecasted third quarter average production of approximately 100,000 boe per day, which was lower than the second quarter of 2014 reflecting additions from planned capital activities being weighted to the end of the third quarter and anticipated higher levels of planned turnaround activity in the quarter. Average production for the third quarter of 2014 was 100,839 boe per day, consistent with the Company's target.
PRELIMINARY 2015 OUTLOOK
For 2015, the Board has approved a capital budget of approximately $840 million. 2015 forecast average production is expected to be between 95,000 and 105,000 boe per day. Full year funds flow is forecast to be between $875 and $925 million based on pricing assumptions of C$86.50 per barrel of Canadian light sweet, C$3.69 per mcf AECO, and a C$/US$ foreign exchange rate of $1.04.
The Company plans to hold a conference call to discuss the details of the 2015 capital budget and an update to the long-term plan on the morning of Monday, November 17, 2014.
Conference call details are expected to be announced on Monday, November 10, 2014.
This news release includes non-GAAP measures not defined under International Financial Reporting Standards ("IFRS") including funds flow, funds flow per share-basic, funds flow per share-diluted, funds flow netback per barrel, netback and gross revenues. 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. Funds flow is cash flow from operating activities before changes in non-cash working capital and decommissioning expenditures. Funds flow is used to assess the Company's ability to fund dividends and planned capital programs. See "Calculation of Funds Flow" below. Netback is a per-unit-of-production measure of operating margin used in capital allocation decisions, to economically rank projects and is the per-unit-of-production amount of revenue less royalties, operating costs, transportation and realized risk management gains and losses. Funds flow netback per barrel is cash flow from operating activities before changes in non-cash working capital and decommissioning expenditures on a per barrel basis. Gross revenue is total revenues including realized risk management gains and losses and is used to assess the cash realizations on commodity sales.
Calculation of Funds Flow
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 may be misleading as an indication of value, particularly if used in isolation.
Certain statements contained in this document constitute forward-looking
statements or information (collectively "forward-looking statements")
within the meaning of the "safe harbour" provisions of applicable
securities legislation. In particular, this document contains
forward-looking statements pertaining to, without limitation, the
following: under "President's Message", our belief that we continue to
make progress, our belief that the Company's third quarter capital
program sets up the Company for an improvement in fourth quarter
production volumes, our forecast average daily production volumes for
2014, our belief that we have "turned the corner", our expectation that
we will deliver a stronger percentage of funds flow netback per barrel
against out realized price, our expectation that the trend of cost
control will continue to improve into 2015, our belief that our
long-term plan has been prepared to position the business for success
in a low commodity price environment, our belief that we can hold our
course into 2015 in the current environment, our expectation that our
operational plans for the first half of 2015 will not change, our
expectation that should we continue to see commodity price weakness
(sub C$75 per barrel) through to the second quarter of 2015 we may
consider adjusting capital allocations in some of our second half
programs, and our committed to continuing to make the right decisions
for the long-term value of the Company for our shareholders; under
"Disposition Update", our expectation that, upon completion of the sale
of non-core assets announced on October 23, 2014, we will have $1
billion in asset sales since the November 2013 announcement of our
long-term divestment plan and will have reduced our debt position by
over $1.2 billion during that same period, and our intention to direct
our future disposition efforts to non-producing assets as we continue
to increase the focus on our core areas and improve our financial
flexibility; under "Dividend Sustainability", our belief that the
Company is able to fund its capital expenditure programs in conjunction
with paying a dividend, and our intention that the updated long
term-plan will provide a renewed vision of growth in both production
and profitability through a continued pursuit of operational
discipline, cost control and focused capital programs on Penn West's
core areas; under "Play Updates", all matters pertaining to our planned
operations in the fourth quarter of 2014 and beyond, including (i) in
respect of our Cardium play, the expectation that the increase in
multi-well pads will provide cost efficiencies and drive incremental
cost savings, the expectation that the remaining planned Cardium wells
will be spud in the fourth quarter, and the expectation that water
flood programs will mitigate natural declines and increase the ultimate
recovery of light oil resource in our Cardium areas as reservoir
pressures are optimized, (ii) in respect of our Viking play, our target
to achieve average per well D&C costs in the Viking area of below
$800,000 on a sustainable basis, and our belief that an expanded down
spacing program would significantly increase the existing 400-500
drilling locations we currently have estimated, (iii) in respect of our
Slave Point play, our intention to focus development activities for the
remainder of the year on completions and tie-in operations, our
expectation to better understand an optimal and economically
competitive strategy in the Slave Point play as we continue to assess
the various D&C techniques employed in the Slave Point Carbonates and
Swan, our belief that our long-term plan D&C target costs of $4.5
million average per well are achievable utilizing certain of the
techniques that we have tested this year, and our plan to obtain
recoveries and sustainability of longer-term production performance
before significant capital is committed; and (iv) in respect of our
Duvernay play, our expectation the 7-16 horizontal production well will
be on production in December 2014; under "Remediation of Accounting
Practices Update", our belief that increasing organizational awareness
and understanding of the importance of internal controls will
significantly decrease the risk of errors in our financial statements,
the commitment of senior management to emphasize adherence to the
Company's policies and standards on an ongoing basis, and the
continuation of remediation efforts in the coming months; and under
"Outlook", our forecast average daily production volumes for 2014 and
2015, our forecast capital budgets for 2014 and 2015, and our forecast
funds flow for 2015.
With respect to forward-looking statements contained in this document,
we have made assumptions regarding, among other things: 2015 prices of
C$86.50 per barrel of Canadian light sweet, C$3.69 per mcf AECO, and a
C$/US$ foreign exchange rate of $1.04; matters with respect to the
non-core asset disposition described herein, including that the closing
conditions will be met or waived, and that the disposition will close
on the terms and on the timeline disclosed herein; that we do not
dispose of additional material producing properties; 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 amount of future cash dividends that we intend to
Although we believe 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 we are unable to close the disposition disclosed herein on the terms described or at all, whether due to the failure to receive requisite regulatory or other third party approvals or satisfy applicable closing conditions or for other reasons that we cannot anticipate; the possibility that we will not be able to successfully execute our long-term plan (including our 2014 plans described herein) in part or in full, and the possibility that some or all of the benefits that we anticipate will accrue to our Company and our securityholders as a result of the successful execution of such plans do not materialize; the possibility that we are unable to execute some or all of our ongoing non-producing asset disposition program on favourable terms or at all; 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 Revised 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.
See accompanying notes to the unaudited interim consolidated financial statements.
Subsequent events (Note 10 and 13)
Commitments and contingencies (Note 12)
See accompanying notes to the unaudited interim consolidated financial statements.
See accompanying notes to the unaudited interim consolidated financial statements.
See accompanying notes to the unaudited interim consolidated financial statements.
Notes to the Consolidated Financial Statements
(All tabular amounts are in CAD millions except numbers of common shares, per share amounts, percentages and various figures in Note 9)
1. Structure of Penn West
Penn West Petroleum Ltd. ("Penn West" or the "Company") is a senior 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.
2. Restatement of Previously Issued Consolidated Financial Statements
Penn West has restated its consolidated balance sheet as of December 31, 2013, and its consolidated statements of income (loss), consolidated statements of cash flows and consolidated statements of changes in shareholders' equity for the three and nine month periods ended September 30, 2013.
The following tables present the impact of the restatement adjustments on the Company's previously reported consolidated financial statements as of December 31, 2013, and for the three month and nine month periods ended September 30, 2013. The "As Restated" columns reflect final adjusted balances after the restatement.
For further information regarding the restatement, please refer to Note 2 to Penn West's restated audited consolidated financial statements for the years ended December 31, 2013 and 2012.
Notes 6 and 10 have been restated to reflect amendments to the comparative figures arising as a result of the restatement.
3. Statement of compliance and basis of presentation
a) 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 restated 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 restated annual audited consolidated financial statements as at and for the year ended December 31, 2013, except as described in c) below.
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 4, 2014.
b) 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.
c) Changes in accounting policies
During the first quarter of 2014, Penn West adopted the following standards all of which were applied retrospectively.
IAS 32, "Financial Instruments: Presentation", which clarifies the requirements for offsetting financial assets and liabilities. The amendments clarify when an entity has a legally enforceable right to offset and certain other requirements that are necessary to present a net financial asset or liability. There was no impact to Penn West on adoption of this standard.
IFRIC 21 "Levies" provides guidance on accounting for levies in accordance with the requirements of IAS 37, "Provisions, Contingent Liabilities and Contingent Assets". There was no impact to Penn West on adoption of this standard.
4. Deferred funding assets
Deferred funding amounts are the amounts recoverable from partners of certain Penn West costs incurred under its joint ventures. In the Peace River Oil Partnership, Penn West recovers a portion of its share of certain capital and operating costs and in the Cordova Joint Venture, a portion of its share of certain capital expenditures. Amounts expected to be settled within the next 12 months are classified as current assets.
5. Exploration and evaluation ("E&E") assets
6. Property, plant and equipment
7. Long-term debt
The split between current and non-current long-term debt is as follows:
During the second quarter of 2014, Penn West repaid $59 million on its senior unsecured notes as they matured (2013 - $5 million). There have been no senior unsecured notes issued in 2014 or 2013.
Additional Information on Penn West's senior unsecured notes was as follows:
During the second quarter of 2014, the Company renewed its unsecured, revolving syndicated bank facility and voluntarily reduced its aggregate borrowing capacity from $3.0 billion to $1.7 billion. The new bank facility consists of two tranches: tranche one has a $1.2 billion borrowing limit and an extendible five-year term (May 6, 2019 maturity date) and tranche two has a $500 million borrowing limit and a June 30, 2016 maturity date. The 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 consolidated financial ratios. At September 30, 2014, the Company had approximately $1.6 billion 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 in short-term money market instruments. As at September 30, 2014, five percent (2013 - none) of Penn West's long-term debt instruments were exposed to changes in short-term interest rates.
The Company is subject to certain financial covenants under its bank facility and senior unsecured notes. These financial covenants are typical for senior unsecured 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. As at September 30, 2014, the Company was in compliance with all of its financial covenants under such lending agreements.
Letters of credit totalling $28 million were outstanding on September 30, 2014 (2013 - $7 million) that reduce the amount otherwise available to be drawn on the bank facility.
Realized gains and losses on the interest rate swaps are recorded as financing costs. For the third quarter of 2014 an expense of nil (2013 - $3 million) was incurred and for the first nine months of 2014 an expense of $1 million (2013 - $7 million) was incurred to reflect that the floating interest rate was lower than the fixed interest rate transacted under Penn West's interest rate swaps. Penn West's outstanding interest rate swaps expired in January 2014.
8. Decommissioning liability
The decommissioning liability was determined by applying an inflation factor of 2.0 percent (December 31, 2013 - 2.0 percent) to estimated future decommissioning costs and discounting the inflated amounts using a credit-adjusted rate of 6.5 percent (December 31, 2013 - 6.5 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:
9. Risk management
Financial instruments included in the balance sheets 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 unsecured notes described in Note 7, 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 bank facility. At September 30, 2014, the estimated fair values of the principal and interest obligations of the outstanding unsecured notes totalled $2.2 billion (December 31, 2013 - $2.2 billion) compared to the carrying value of $2.1 billion (December 31, 2013 - $2.1 billion).
As at September 30, 2014 and December 31, 2013, the only asset or liability measured at fair value on a recurring basis was risk management 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 fair values of all outstanding commodity, power, interest rate and foreign exchange contracts are reflected on the balance sheet with the changes during the period recorded in income through risk management.
The following table reconciles the changes in the fair value of financial instruments outstanding:
Based on September 30, 2014 pricing, a $0.10 change in the price per mcf of natural gas would have changed pre-tax unrealized risk management by $3 million.
Penn West had the following financial instruments outstanding as at September 30, 2014. 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 our credit facility or with high credit ratings and by obtaining financial security in certain circumstances.
During the third quarter of 2014, Penn West temporarily assigned its crude oil transportation capacity on the Flanagan South pipeline system.
Operating costs for the third quarter of 2014 include a realized gain on electricity contracts of $1 million (2013 - $3 million) and for the nine months ended September 30, 2014 a realized loss of $1 million (2013 - $11 million gain).
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 restated annual audited consolidated financial statements.
10. Shareholders' equity (restated)
ii) Earnings per share - Basic and Diluted
The weighted average number of shares used to calculate per share amounts was as follows:
For the third quarter of 2014, 14.5 million shares (2013 - 16.7 million) that were issuable on exercise of options or rights issued under the Stock Option Plan ("Option Plan") and Common Share Rights Incentive Plan ("CSRIP") were excluded in calculating the weighted average number of diluted shares outstanding as they were considered anti-dilutive.
For the first nine months of 2014, 14.5 million shares (2013 - 16.7 million) that were issuable on exercise of options or rights issued under the Option Plan and CSRIP were excluded in calculating the weighted average number of diluted shares outstanding as they were considered anti-dilutive.
Including dividends paid and subsequently reinvested in common shares issued from treasury pursuant to the Company's Dividend Reinvestment and Optional Share Purchase Plan ("DRIP"), Penn West paid dividends of $0.14 per share totalling $69 million in the third quarter of 2014 and $206 million in the first nine months of 2014. On October 15, 2014, Penn West paid its third quarter dividend of $0.14 per share totalling $69 million. On November 4, 2014, Penn West declared its fourth quarter dividend of $0.14 per share to be paid on January 15, 2015 to shareholders of record on December 31, 2014.
11. Share-based compensation
Stock Option Plan
Penn West has an Option Plan that allows it to issue options to acquire common shares to officers, employees and other service providers. The plan came into effect on January 1, 2011.
Under the terms of the plan, the number of options reserved for issuance under the Option Plan plus the number of common share rights reserved for issuance under the CSRIP shall not exceed nine 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 Toronto Stock Exchange ("TSX") for the five trading days immediately preceding the date of grant. Options granted to date vest over a four-year period and expire five years after the respective date of grant.
The CSRIP includes Restricted Options, Restricted Rights and Share Rights.
The remaining Restricted Options and Restricted Rights are fully vested and expire in 2014. A Restricted Option and related Restricted Right must be exercised simultaneously with the Restricted Option settled in common shares while the Restricted Right can be settled in common shares or cash, at the election of the holder.
The fair value of the Restricted Rights is classified as a liability due to the cash settlement feature. At September 30, 2014, the value of the restricted rights was nil (2013 - nil).
The exercise price for Share Rights is reduced for dividends paid in certain circumstances.
There has been no issuance of Restricted Options, Restricted Rights or Share Rights subsequent to January 1, 2011, and there will be no issuance under the CSRIP in the future.
Long-term retention and incentive plan ("LTRIP")
Under the LTRIP, certain Penn West employees receive cash consideration that fluctuates based on Penn West's share trading price on the TSX. Eligible employees receive a grant of a specific number of LTRIP awards (each of which notionally represents a common share) that vest over a three-year period with the cash value paid to the employee on each vesting date. If the service requirements are met, the cash consideration paid is based on the number of LTRIP awards vested and the five-day weighted average trading price of the common shares on the TSX prior to the vesting date plus dividends per share declared by Penn West during the period preceding the vesting date.
At September 30, 2014, LTRIP obligations of $9 million were classified as a current liability (December 31, 2013 - $10 million) included in accounts payable and accrued liabilities and $5 million was classified as a non-current liability (December 31, 2013 - $7 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, 2014, 144,154 DSUs (December 31, 2013 - 104,663) were outstanding and $1 million was recorded as a current liability (December 31, 2013 - $1 million).
Performance Share Unit ("PSU") plan
The PSU plan became effective in 2013 and 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. Non-employee members of the Board of Directors are not eligible to participate in the PSU Plan.
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 trading price on the TSX at the end of each reporting period, plus accumulated dividends per share, all multiplied by a performance factor determined by the Board of Directors based on earlier defined performance measures and formulae. At September 30, 2014, $1 million (December 31, 2013 - $1 million) was classified as a current liability included in accounts payable and accrued liabilities and $2 million was classified as a non-current liability (December 31, 2013 - $2 million) included in other non-current liabilities.
Share-based compensation is based on the fair value of the options at the time of grant under the Option Plan and the CSRIP which is amortized over the remaining vesting period on a graded vesting schedule. Share-based compensation under the LTRIP, DSUs and PSUs 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:
The share-based compensation related to the CSRIP was insignificant in both 2014 and 2013. The share price used in the fair value calculation of the Restricted Rights, LTRIP, DSU and PSU obligations at September 30, 2014 was $7.59 (2013 - $11.43).
A Black-Scholes option-pricing model was used to determine the fair value of options granted in 2014 under the Option Plan with the following fair value per option and weighted average assumptions:
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 on behalf of employees by an independent trustee on the TSX at prevailing trading prices.
12. 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 the third quarter of 2014, the Company became aware of a number of putative securities class action claims having been filed or threatened to be filed in both Canada and the United States relating to damages alleged to have been incurred due to a decline in share price related to the restatement of certain of the Company's historical financial statements and related MD&A. During the quarter, the Company was served with statements of claim against the Company and certain of its present and former directors and officers relating to such types of securities class actions in the Provinces of Alberta, Ontario and Quebec and in the United States. To date, none of these proceedings has been certified under applicable class proceedings legislation. In the United States, the Court has consolidated the various actions, appointed lead plaintiffs, and set a scheduling for the parties to brief a motion to dismiss. Amounts claimed in the Canadian and United States proceedings are significant, but at this stage in the process, any estimate of the Company's potential exposure or liability, if any, is premature and cannot be meaningfully determined. The Company intends to vigorously defend against any such actions.
13. Subsequent event
Subsequent to the end of the third quarter, Penn West announced it had an agreement in place to dispose of non-core assets located in south central Alberta for proceeds of approximately $355 million. The assets are currently producing approximately 7,500 boe per day, weighted approximately 80 percent toward natural gas and natural gas liquids. Subject to the satisfaction of customary regulatory and other closing conditions, Penn West expects the transaction to close in early December 2014.
Penn West is one of the largest conventional oil and natural gas producers in Canada. Our goal is to be the company that redefines oil & gas excellence in western Canada. Based in Calgary, Alberta, Penn West operates a significant portfolio of opportunities with a dominant position in light oil in Canada on a land base encompassing approximately five million acres.
Penn West shares are listed on the Toronto Stock Exchange under the symbol PWT and on the New York Stock Exchange under the symbol PWE.
Third Quarter Results Conference Call Details
A conference call and webcast presentation will be held to discuss the matters noted above at 9:00am Mountain Time (11:00am Eastern Time) on Wednesday, November 5, 2014.
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=864683&s=1&k=01341446993A7D99459651DFD5664A2C
A digital recording will be available for replay two hours after the call's completion, and will remain available until October 2, 2014 21:59 Mountain Time (23:59 Eastern Time). To listen to the replay, please dial 416-849-0833 or 1-855-859-2056 (toll-free) and enter Conference ID 5903255, followed by the pound (#) key.
SOURCE Penn West
For further information: