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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.

                     
  Three months ended September 30 Nine months ended September 30
    2014   (restated)
2013
% change  
2014
  (restated)
2013
% change
Financial
(millions, except per share amounts)
                   
Gross revenues (1,2) $ 584 $ 773 (24) $ 1,902 $ 2,222 (14)
Funds flow (2)   231   296 (22)   798   782 2
   Basic per share (2)   0.47   0.61 (23)   1.62   1.61 1
   Diluted per share (2)   0.47   0.61 (23)   1.62   1.61 1
Net income (loss)   (15)   34 >(100)   39   (134) >100
   Basic per share   (0.03)   0.07 >(100)   0.08   (0.28) >100
   Diluted per share   (0.03)   0.07 >(100)   0.08   (0.28) >100
Development capital expenditures (3)   225   75 >100         485   528 (8)
Long-term debt at period-end $ 2,192 $ 3,004 (27) $ 2,192 $ 3,004 (27)
                     
Dividends
(millions)
                   
Dividends paid (4) $ 69 $ 131 (47) $ 206 $ 390 (47)
DRIP   (14)   (27) (48)   (43)   (81) (47)
Dividends paid in cash $ 55 $ 104 (47) $ 163 $ 309 (47)
                       
Operations                    
Daily production (average)                    
   Light oil and NGL (bbls/d)   51,675   68,977 (25)   55,301   71,451 (23)
   Heavy oil (bbls/d)   13,012   15,483 (16)   13,251   15,817 (16)
   Natural gas (mmcf/d)   217   296 (27)   226   309 (27)
Total production (boe/d) (5)   100,839   133,712 (25)   106,296   138,833 (23)
Average sales price                    
   Light oil and NGL (per bbl) $ 87.49 $ 92.42 (5) $ 91.19 $ 85.01 7
   Heavy oil (per bbl)   72.38   84.02 (14)   73.73   67.13 10
   Natural gas (per mcf) $ 4.33 $ 2.83 53 $ 5.03 $ 3.24 55
Netback per boe                    
   Sales price $ 63.49 $ 63.67 - $ 67.35 $ 58.63 15
   Risk management gain (loss)   (0.65)   (0.50) 30   (1.91)   0.01 >(100)
   Net sales price   62.84   63.17 (1)   65.44   58.64 12
   Royalties   (8.99)   (9.37) (4)   (10.23)   (8.34) 23
   Operating expenses   (20.74)   (19.48) 6   (18.75)   (20.60) (9)
   Transportation   (0.60)   (0.58) 3   (0.61)   (0.59) 3
   Netback (2) $ 32.51 $ 33.74 (4) $ 35.85 $ 29.11 23

(1)      Gross revenues include realized gains and losses on commodity contracts.
(2)      The terms "gross revenues", "funds flow", "funds flow per share-basic", "funds flow per share-diluted" and "netback" are non-GAAP measures. Please refer to the "Calculation of Funds Flow" and "Non-GAAP Measures" advisory" disclosures below.
(3)      Includes capital carried by partners.
(4)      Includes dividends paid in cash that are subsequently reinvested to purchase shares from treasury under the dividend reinvestment plan.
(5)     Please refer to the "Oil and Gas Information Advisory" section below for information regarding the term "boe".

PRESIDENT'S MESSAGE

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.

HIGHLIGHTS

  • Production in the third quarter averaged 100,839 boe per day compared to 133,712 boe per day in the third quarter of 2013. Penn West's production volumes were consistent with its previous forecast of 100,000 boe per day on average for the third quarter.

  • Funds flow for the third quarter of 2014 was $231 million ($0.47 per share - basic) compared to $296 million in the comparative period in 2013. The decline is attributed to lower crude oil prices and lower production volumes due to asset dispositions which both contributed to lower revenues.

  • Development capital expenditures for the third quarter of 2014 were $225 million compared to $75 million in the comparative period in 2013. Third quarter activities proceeded as planned with a focus on development activities in the Cardium and Viking areas and appraisal activities in the Slave Point area.

  • Over 90 percent of all net wells drilled were in the Company's three core light oil areas.

  • As at September 30, 2014, the Company was in compliance with all financial covenants under its lending agreements. Specifically, the reported senior debt to EBITDA ratio of 2:1 times in the quarter is well within the covenant threshold of 3:1, and the senior debt to capitalization of 23 percent is well within the covenant threshold of 50 percent.

DISPOSITION UPDATE

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.

DIVIDEND SUSTAINABILITY

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

                         
    Number of Wells  
    Drilled   Completed On production
Business Unit   Gross   Net   Gross   Net   Gross   Net
Cardium   20.0   19.6   7.0   6.4   7.0   6.4
Viking   48.0   48.0   40.0   40.0   30.0   30.0
Slave Point   5.0   5.0   3.0   3.0   3.0   3.0
Total   73.0   72.6   50.0   49.4   40.0   39.4

PLAY UPDATES

Cardium

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.

Viking

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.

Slave Point

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.

Duvernay

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.

DRILLING STATISTICS

    Three months ended
September 30
  Nine months ended
September 30
  2014   2013   2014   2013
    Gross   Net   Gross   Net   Gross   Net   Gross   Net
Oil   95   77   51   29   172   134   207   148
Natural gas   7   2   2   1   7   2   3   2
    102   79   53   30   179   136   210   150
Stratigraphic and service   3   -   3   1   7   1   36   17
Total   105   79   56   31   186   137   246   167
Success rate (1)       100%       100%       100%       100%

(1)      Success rate is calculated excluding stratigraphic and service wells.
(2)      Drilling statistics table includes both operated and non-operated activity.

CAPITAL EXPENDITURES

  Three months ended
September 30
Nine months ended
September 30
(millions)   2014   2013(2) % change   2014   2013(2) % change
Land acquisition and retention $ 1 $ 1 -  $ 2 $ 4 (50)
Drilling and completions   172   40 >100   345   338 2
Facilities and well equipping   52   36 44   135   237 (43)
Geological and geophysical   -   - -   7   9 (22)
Corporate   7   2 >100   10   7 43
Capital carried by partners   (7)   (4) 75   (14)   (67) (79)
Exploration and development capital (1)   225   75 >100   485   528 (8)
Property dispositions, net   (3)   (16) 81   (215)   (63) >100
Total capital expenditures $ 222 $ 59 >100 270 $ 465 (42)

(1) Exploration and development capital includes costs related to Property, Plant and Equipment and Exploration and Evaluation activities.
(2) Restated.

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.

LAND

  As at September 30
  Producing Non-producing
  2014   2013   %
change
  2014   2013   %
change
Gross acres (000s) 4,310   5,218   (17)   2,598   2,967   (12)
Net acres (000s) 2,941   3,535   (17)   1,781   2,022   (12)
Average working interest 68%   68%   -   69%   68%   1

COMMON SHARE DATA

  Three months ended September 30 Nine months ended September 30
(millions of shares) 2014 2013 %
change
2014 2013 %
change
Weighted average            
  Basic 494.8 487.4 2 492.6 484.6 2
  Diluted 494.8 488.1 1 492.6 484.6 2
  Outstanding as at September 30       495.0 488.1 1

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:

  • Holding a "town hall" meeting with all employees, led by the CEO and CFO, during which the values of the Company were reiterated, focusing on integrity and open communication. Information outlining the Company's whistleblower line and its purpose was also provided to all employees.
  • Engagement of an external third party to lead the internal control testing function, with a mandate to strengthen the specificity and enhanced accountability of the control functions.
  • Additional training and education regarding policies and procedures commenced for accounting managers.

These remediation activities will continue in the coming months.

OUTLOOK

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.

2014 OUTLOOK

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.

All press releases referenced above are available on the Company's website at www.pennwest.com, on SEDAR at www.sedar.com, and on EDGAR at www.sec.gov.

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.

Non-GAAP Measures

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

(millions, except per share amounts) Three months ended
September 30
  Nine months ended
September 30
  2014   2013(1)     2014   2013(1)
Cash flow from operating activities $ 292 $ 258   $ 728 $ 654
Change in non-cash working capital   (73)   13     38   78
Decommissioning expenditures   12   25     32   50
Funds flow $ 231 $ 296   $ 798 $ 782
                   
Basic per share $ 0.47 $ 0.61   $ 1.62 $ 1.61
Diluted per share $ 0.47 $ 0.61   $ 1.62 $ 1.61

(1) Certain financial information for the three and nine month periods ended September 30, 2013 has been restated.  See Note 2 to Penn West's unaudited consolidated interim financial statements for the three and nine month periods ended September 30, 2014 and 2013 for details regarding the restatement.

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.

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 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 pay.

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.


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 any forward-looking statements. The forward-looking statements contained in this document are expressly qualified by this cautionary statement.

   Penn West Petroleum Ltd.
Consolidated Balance Sheets
           
(CAD millions, unaudited) Note   September 30, 2014   December 31, 2013
(restated - note 2)
Assets          
Current          
  Accounts receivable   $ 232 $ 265
  Other                         61   57
  Deferred funding assets 4   91   139
  Risk management 9   7   2
      391   463
Non-current          
   Deferred funding assets 4   195   184
   Exploration and evaluation assets 5   682   645
   Property, plant and equipment 6   8,679   9,075
   Goodwill     1,887   1,912
   Risk management 9   80   50
      11,523   11,866
Total assets   $ 11,914 $ 12,329
           
Liabilities and Shareholders' Equity          
Current          
  Accounts payable and accrued liabilities   $ 559 $ 598
  Dividends payable     69   68
  Current portion of long-term debt 7   265   64
  Risk management 9   7   24
      900   754
Non-current          
   Long-term debt 7   1,927   2,394
   Decommissioning liability 8   549   603
   Risk management 9   11   16
   Deferred tax liability     1,114   1,040
   Other non-current liabilities 11   7   9
      4,508   4,816
Shareholders' equity          
   Shareholders' capital  10   8,968   8,913
   Other reserves     86   80
   Deficit     (1,648)   (1,480)
          7,406   7,513
Total liabilities and shareholders' equity   $ 11,914 $ 12,329

See accompanying notes to the unaudited interim consolidated financial statements.

Subsequent events (Note 10 and 13)

Commitments and contingencies (Note 12)

Penn West Petroleum Ltd.
Consolidated Statements of Income (Loss)
                   
  Three months ended
September 30
Nine months ended
September 30
(CAD millions, except per share amounts, unaudited) Note   2014   2013
(restated
- Note 2)
  2014   2013
(restated
- Note 2)
                   
  Oil and natural gas sales   $ 590 $ 779 $ 1,957 $ 2,221
  Royalties     (83)   (116)   (297)   (316)
      507   663   1,660   1,905
                   
  Risk management gain (loss)                  
       Realized     (6)   (6)   (55)   1
        Unrealized 9   24   (42)   25   (81)
      525   615   1,630   1,825
                   
Expenses                  
  Operating     193   240   544   781
  Transportation     6   7   18   22
  General and administrative     34   40   104   126
  Restructuring     1   25   12   38
  Share-based compensation 11   1   6   18   30
  Depletion and depreciation 6   181   256   555   792
  Loss (gain) on dispositions     -   (5)   48   (9)
   Exploration and evaluation     -   -   16   -
   Unrealized risk management gain 9   (27)   (24)   (32)   (27)
  Unrealized foreign exchange loss (gain)      83   (30)   89   63
  Financing 7   37   47   118   139
  Accretion 8   9   11   27   33
      518   573   1,517   1,988
Income (loss) before taxes     7   42   113   (163)
                   
  Deferred tax expense (recovery)     22   8   74   (29)
                   
Net and comprehensive income (loss)   $ (15) $ 34 $ 39 $ (134)
                   
Net income (loss) per share                  
  Basic   $ (0.03) $   0.07 $    0.08 $    (0.28)
  Diluted   $ (0.03) $   0.07 $    0.08 $    (0.28)
Weighted average shares outstanding (millions)                  
  Basic 10   494.8   487.4   492.6     484.6
  Diluted 10   494.8   488.1   492.6     484.6

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   2014   2013
(restated
- Note 2)
  2014   2013
(restated
- Note 2)
                   
Operating activities                  
  Net income (loss)   $ (15) $ 34 $ 39 $ (134)
  Depletion and depreciation 6   181   256   555   792
  Loss (gain) on dispositions     -   (5)   48   (9)
  Exploration and evaluation     -   -   16   -
  Accretion 8   9   11   27   33
  Deferred tax expense (recovery)     22   8   74   (29)
  Share-based compensation  11   2   4   7   12
  Unrealized risk management loss (gain) 9   (51)   18   (57)   54
  Unrealized foreign exchange loss (gain)     83   (30)   89   63
  Decommissioning expenditures 8   (12)   (25)   (32)   (50)
  Change in non-cash working capital     73   (13)   (38)   (78)
      292   258   728   654
Investing activities                  
  Capital expenditures     (225)   (75)   (485)   (528)
  Property dispositions (acquisitions), net     3   16   215   63
  Change in non-cash working capital     110   (10)   49   (140)
      (112)   (69)   (221)   (605)
Financing activities                  
  Increase (decrease) in bank loan     (125)   (91)   (296)   257
  Repayment of senior notes     -   -   (59)   (5)
  Issue of equity     -   6   11   8
  Dividends paid     (55)   (104)   (163)   (309)
      (180)   (189)   (507)   (49)
                   
Change in cash     -   -   -   -
Cash, beginning of period     -   -   -   -
Cash, end of period   $ - $ - $ - $ -

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, 2014   $ 8,913 $ 80 $ (1,480) $ 7,513
Net and comprehensive income     -   -   39   39
Share-based compensation 11   -   7   -   7
Issued on exercise of options 10   12   (1)   -   11
Issued to dividend reinvestment plan 10   43   -   -   43
Dividends declared 10   -   -   (207)   (207)
Balance at September 30, 2014   $ 8,968 $ 86 $ (1,648) $ 7,406
                   
(CAD millions, unaudited)
(restated - Note 2)
   
Note   Shareholders'
Capital
  Other
Reserves
  Deficit   Total
                   
Balance at January 1, 2013   $ 8,774 $ 97 $ (277) $ 8,594
Net and comprehensive loss     -   -   (134)   (134)
Share-based compensation 11   -   12   -   12
Issued on exercise of options and share rights 10   37   (29)   -   8
Issued to dividend reinvestment plan 10   81   -   -   81
Dividends declared 10   -   -   (329)   (329)
Balance at September 30, 2013   $ 8,892 $ 80 $ (740) $ 8,232

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.

Effect on Consolidated Balance Sheets
  As
reported
    Adjustment     As
restated
  December 31, 2013
                 
Assets                
Current                
   Accounts receivable $ 263   $ 2   $ 265
   Other   57     -     57
   Deferred funding assets   139     -     139
   Risk management   2     -     2
    461     2     463
Non-current                
   Deferred funding assets   184     -     184
   Exploration and evaluation assets   645     -     645
   Property, plant and equipment   9,392     (317)     9,075
   Goodwill   1,912     -     1,912
   Risk management   50     -     50
    12,183     (317)     11,866
Total assets $ 12,644   $ (315)   $ 12,329
                 
Current                
   Accounts payable and accrued liabilities $ 654   $ (56)   $ 598
   Dividends payable   68     -     68
   Current portion of long-term debt   64     -     64
   Risk management   24     -     24
    810     (56)     754
Non-current                
   Long-term debt   2,394     -     2,394
   Decommissioning liability   603     -     603
   Risk management   16     -     16
   Deferred tax liability   1,102     (62)     1,040
   Other non-current liabilities   9     -     9
    4,934     (118)     4,816
Shareholders' equity                
   Shareholders' capital   9,124     (211)     8,913
   Other reserves   80     -     80
   Deficit   (1,494)     14     (1,480)
    7,710     (197)     7,513
Total liabilities and shareholders' equity $ 12,644   $ (315)   $ 12,329

 
 
Effect on Consolidated Statement of Income (Loss)
  As
reported
    Adjustment  
As
restated
    As
reported
    Adjustment     As
restated
  Three months ended
September 30, 2013
    Nine months ended
September 30, 2013
                                   
Oil and natural gas sales $ 779   $ -   $ 779   $ 2,221   $ -   $ 2,221
Royalties   (141)     25     (116)     (392)     76     (316)
    638     25     663     1,829     76     1,905
                                   
    Risk management gain (loss)                                  
    Realized   (6)     -     (6)     1     -     1
    Unrealized   (42)     -     (42)     (81)     -     (81)
    590     25     615     1,749     76     1,825
                                   
Expenses                                  
   Operating   218     22     240     649     132     781
   Transportation   7     -     7     22     -     22
   General and administrative   40     -     40     126     -     126
   Restructuring   25     -     25     38     -     38
   Share-based compensation   6     -     6     30     -     30
   Depletion, depreciation and impairment   263     (7)     256     812     (20)     792
   Gain on dispositions   (5)     -     (5)     (5)     (4)     (9)
   Unrealized risk management gain   (24)     -     (24)     (27)     -     (27)
   Unrealized foreign exchange loss (gain)   (30)     -     (30)     63     -     63
   Financing   47     -     47     139     -     139
   Accretion   11     -     11     33     -     33
    558     15     573     1,880     108     1,988
Income (loss) before taxes   32     10     42     (131)     (32)     (163)
                                   
   Deferred tax expense (recovery)   5     3     8     (21)     (8)     (29)
                                   
Net and comprehensive income (loss) $ 27   $ 7   $ 34   $ (110)   $ (24)   $ (134)
                                   
Net income (loss) per share                                  
  Basic $ 0.06   $ 0.01   $ 0.07   $ (0.23)   $ (0.05)   $ (0.28)
  Diluted $ 0.06   $ 0.01   $ 0.07   $ (0.23)   $ (0.05)   $ (0.28)
Weighted average shares outstanding (millions)                                  
  Basic   487.4     -     487.4     484.6     -     484.6
  Diluted   488.1     -     488.1     484.6     -     484.6

 
 
Effect on Consolidated Statement of Cash Flows
  As
reported
    Adjustment     As
restated
    As
reported
    Adjustment     As
restated
  Three months ended
September 30, 2013
    Nine months ended
September 30, 2013
                                   
Operating activities                                  
   Net income (loss) $ 27   $ 7   $ 34   $ (110)   $ (24)   $ (134)
   Depletion and depreciation   263     (7)     256     812     (20)     792
   Loss on dispositions   (5)     -     (5)     (5)     (4)     (9)
   Accretion   11     -     11     33     -     33
   Deferred tax recovery   5     3     8     (21)     (8)     (29)
   Share-based compensation    4     -     4     12     -     12
   Unrealized risk management loss   18     -     18     54     -     54
   Unrealized foreign exchange loss (gain)   (30)     -     (30)     63     -     63
   Decommissioning expenditures   (25)     -     (25)     (50)     -     (50)
   Change in non-cash working capital   (13)     -     (13)     (78)     -     (78)
    255     3     258     710     (56)     654
Investing activities                                  
   Capital expenditures   (69)     (6)     (75)     (608)     80     (528)
   Property dispositions (acquisitions), net   14     2     16     52     11     63
   Change in non-cash working capital   (11)     1     (10)     (105)     (35)     (140)
    (66)     (3)     (69)     (661)     56     (605)
Financing activities                                  
   Increase (decrease) in long-term debt   (91)     -     (91)     257     -     257
   Repayment of senior notes   -     -     -     (5)     -     (5)
   Issue of equity   6     -     6     8     -     8
   Dividends paid   (104)     -     (104)     (309)     -     (309)
    (189)     -     (189)     (49)     -     (49)
                                   
Change in cash   -     -     -     -     -     -
Cash, beginning of period   -     -     -     -     -     -
Cash, end of period $ -   $ -   $ -   $ -   $ -   $ -

 
 
Effect on Deficit
    As
reported
    Adjustment     As
restated
  September 30, 2013
                 
Deficit                
  Balance, beginning of period $ (262)   $ (15)   $ (277)
  Net and comprehensive income (loss)   (110)     (24)     (134)
  Dividends Declared    (329)     -     (329)
  Balance, end of period $ (701)   $ (39)   $ (740)

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.

  September 30, 2014     December 31, 2013
Peace River Oil Partnership $ 202     $ 235
Cordova Joint Venture   84       88
Total $ 286     $ 323
             
Current portion $ 91     $ 139
Long-term portion   195       184
Total $ 286     $ 323
             

5. Exploration and evaluation ("E&E") assets

  Nine months ended
September 30, 2014
    Year ended
December 31, 2013
Balance, beginning of period $ 645     $ 609
Capital expenditures   42       18
Joint venture, carried capital   11       62
Expense   (16)       (44)
Balance, end of period $ 682     $ 645
             

6. Property, plant and equipment

Cost     Nine months ended
September 30, 2014
    (restated)
Year ended
December 31, 2013
Balance, beginning of period     $ 17,974     $ 18,646
Capital expenditures       443       670
Joint venture, carried capital       3       22
Acquisitions       10       18
Dispositions       (699)         (1,373)
Decommissioning additions (dispositions), net       (49)               (9)
Balance, end of period     $ 17,682     $ 17,974
                 
                 
Accumulated depletion and depreciation     Nine months ended
September 30, 2014
    Year ended
December 31, 2013
Balance, beginning of period     $ 8,899     $ 8,052
Depletion and depreciation       555       1,023
Impairments       -       670
Dispositions       (451)          (846)
Balance, end of period     $ 9,003     $ 8,899
                 
                 
Net book value     September 30, 2014     December 31, 2013
Total     $ 8,679     $ 9,075
                 

7. Long-term debt

    Amount (millions)   Maturity dates   Average
interest
rate
  September 30, 2014   December 31, 2013
2007 Notes   US$475   2015 - 2022   5.80%   $ 532   $ 505
2008 Notes   US$480, CAD$30   2016 - 2020   6.25%     568     541
UK Notes   £57   2018   6.95% (1)     103     100
2009 Notes   US$94, £20,
€10 (2)
  2014 - 2019   8.85% (3)     156     213
2010 Q1 Notes   US$250, CAD$50   2015 - 2025   5.47%     330     316
2010 Q4 Notes   US$170, CAD$60   2015 - 2025   5.00%     250     240
2011 Notes   US$105, CAD$30   2016 - 2021   4.49%     148     142
Total senior unsecured notes             2,087     2,057
Credit facility advances             105     401
Total long-term debt           $ 2,192   $ 2,458

(1)   These notes bear interest at 7.78 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.
(2)   A portion of the 2009 Notes have equal repayments and extend over the remaining five years.
(3)   The Company has contracts in place to fix the interest rate on the Pounds Sterling and Euro tranches, initially at 9.49 percent and 9.52 percent, to 9.15 percent and 9.22 percent, respectively, and to fix the exchange rate on repayment.
     

The split between current and non-current long-term debt is as follows:

      September 30, 2014     December 31, 2013
Current portion     $ 265     $ 64
Long-term portion       1,927       2,394
Total     $ 2,192     $ 2,458

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:

      September 30, 2014     December 31, 2013
Weighted average remaining life (years)       3.9       4.5
Weighted average interest rate (1)       6.0%       6.1%

(1)   Includes the effect of cross currency swaps.

 

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:

      Nine months ended
September 30, 2014
      Year ended
December 31, 2013
Balance, beginning of period     $ 603     $ 635
Net liabilities incurred (disposed) (1)       (52)       (90)
Increase in liability due to change in estimate       3       81
Liabilities settled       (32)       (66)
Accretion charges       27       43
Balance, end of period     $ 549     $ 603
     
(1)   Includes additions from drilling activity, facility capital spending and disposals related to net property dispositions.

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:

Risk management asset (liability) Nine months ended
September 30, 2014
    Year ended
December 31, 2013
Balance, beginning of period $ 12     $ 58
Unrealized gain (loss) on financial instruments:            
  Commodity collars and swaps   25       (94)
  Electricity swaps   4       -
  Interest rate swaps   1       9
   Foreign exchange forwards   24       27
   Cross currency swaps   3       12
Total fair value, end of period $ 69     $ 12

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.

    Notional
volume
Remaining
term
  Pricing   Fair value
(millions)
Natural gas                
   AECO Forwards   90,000 mcf/d Oct/14 - Dec/14   $3.90/mcf   $ (3)
   AECO Collars   50,000 mcf/d Oct/14 - Dec/14   $3.41 to $4.17/mcf     (1)
   AECO Collars   70,000 mcf/d Jan/15 - Dec/15   $3.69 to $4.52/mcf     -
                 
Electricity swaps                
   Alberta Power Pool   70 MW Oct/14 - Dec/14   $58.50/MWh     -
   Alberta Power Pool   10 MW       Oct/14 - Dec/15
  $58.50/MWh     (1)
   Alberta Power Pool   70 MW Jan/15 - Dec/15   $55.17/MWh     (3)
   Alberta Power Pool   25 MW Jan/16 - Dec/16   $49.90/MWh     -
             
Crude oil assignment            
   18-month term   10,000 boe/d      Dec/14 - July/16   Differential WCS(Edm) vs.
WCS (USGC)
    12
           
Foreign exchange forwards on senior notes          
   3 to 15-year initial term   US$621 2014 - 2022   0.9986 CAD/USD     74
               
Cross currency swaps              
   10-year initial term   £57 2018   2.0075 CAD/GBP, 6.95%     (9)
   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             $ 69

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).

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 restated annual audited consolidated financial statements.

10. Shareholders' equity (restated)

i) Issued

Shareholders' capital Common Shares     Amount
Balance, January 1, 2013 479,258,670     $ 8,774
Issued on exercise of equity compensation plans (1) 1,239,181       44
Issued to dividend reinvestment plan 9,275,996       95
Cancellations (2) (696,563)       -
Balance, December 31, 2013 489,077,284       8,913
Issued on exercise of equity compensation plans (1) 1,067,000       12
Issued to dividend reinvestment plan 4,857,578       43
Balance, September 30, 2014 495,001,862     $ 8,968

(1)   Upon exercise of options and restricted options, the net benefit is recorded as a reduction of other reserves and an increase to shareholders' capital. Included in the exercised amount for 2013 were 102,793 shares issued from treasury as a result of individuals settling their restricted rights in common shares.
(2)   Relates to shares cancelled on prior acquisitions under the Plan of Arrangement sunset provision.

ii) Earnings per share - Basic and Diluted

The weighted average number of shares used to calculate per share amounts was as follows:

Average Common Shares Outstanding     Three months ended
September 30
    Nine months ended
September 30
(millions of shares)     2014 2013     2014 2013
Weighted average                
   Basic     494.8 487.4     492.6 484.6
   Dilutive impact     - 0.7     - -
   Diluted     494.8 488.1     492.6 484.6

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.

iii) Dividends

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.

      Nine months ended
September 30, 2014
    Year ended
December 31, 2013
Options     Number of
Options
  Weighted
Average
Exercise Price
    Number of
Options
  Weighted
Average
Exercise Price
Outstanding, beginning of period     14,951,830   $ 17.63     15,737,400   $ 22.54
Granted     7,403,400     9.35     8,937,200     10.32
Exercised     (1,067,000)     9.80     (1,000,000)     10.24
Forfeited     (6,783,936)     16.38     (8,722,770)     19.85
Outstanding, end of period     14,504,294   $ 14.56     14,951,830   $ 17.63
Exercisable, end of period     4,324,905   $ 20.39     3,419,818   $ 23.46

CSRIP

The CSRIP includes Restricted Options, Restricted Rights and Share Rights.

      Nine months ended
September 30, 2014
  Year ended
December 31, 2013
Restricted Options     Number of
Restricted
Options
  Weighted
Average
Exercise Price
  Number of
Restricted
Options
  Weighted
Average
Exercise Price
Outstanding, beginning of period     3,055,414   $ 23.84   10,535,361   $ 23.84
Forfeited     (2,896,614)     23.84   (7,479,947)     23.84
Outstanding, end of period     158,800   $ 23.84   3,055,414   $ 23.84
Exercisable, end of period     158,800   $ 23.84   3,055,414   $ 23.84

      Nine months ended
September 30, 2014
  Year ended
December 31, 2013
Restricted rights     Number of
Restricted
Rights
  Weighted
Average
Exercise Price
  Number of
Restricted
Rights
  Weighted
Average
Exercise Price
Outstanding, beginning of period     3,055,414   $ 16.91   10,535,361   $ 13.32
Exercised (1)     -     -   (4,528,893)     6.65
Forfeited     (2,896,614)     16.43   (2,951,054)     16.45
Outstanding, end of period     158,800   $ 17.67   3,055,414   $ 16.91
Exercisable, end of period     158,800   $ 17.67   3,055,414   $ 16.91
   
(1)      Weighted average exercise price includes reductions of the exercise price for dividends paid.

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).

      Nine months ended
September 30, 2014
  Year ended
December 31, 2013
Share Rights     Number of
Share
Rights
  Weighted
Average
Exercise Price
  Number of
Share
Rights
  Weighted
Average
Exercise Price
Outstanding, beginning of period     40,310   $ 15.94   291,638   $ 11.99
Exercised (1)     -     -   (136,388)     6.23
Forfeited     (40,310)     15.66   (114,940)     15.03
Outstanding, end of period     -   $ -   40,310   $ 15.94
Exercisable, end of period     -   $ -   40,310   $ 15.94
   
(1)      Weighted average exercise price includes reductions of the exercise price for dividends paid.

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.

LTRIP awards (number of shares equivalent)     Nine months ended
September 30, 2014
    Year ended
December 31, 2013
Outstanding, beginning of period     2,813,769     1,951,655
Granted     2,482,550     3,102,225
Vested and paid     (1,097,397)           (780,228)
Forfeited     (1,007,053)          (1,459,883)
Outstanding, end of period     3,191,869     2,813,769

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.

PSU awards (number of shares equivalent)     Nine months ended
September 30, 2014
    Year ended
December 31, 2013
Outstanding, beginning of period     969,723     -
Granted     599,000     1,544,429
Vested     (563,609)     (494,140)
Forfeited     (218,772)     (80,566)
Outstanding, end of period     786,342     969,723

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

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:

  Nine months ended September 30
  2014 2013
  Options $ 7 $ 12
  LTRIP   9   13
  PSU   2   4
  DSU   -   1
  Share-based compensation $ 18 $ 30

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:

  Nine months ended September 30
  2014 2013
Average fair value of options granted (per share) $ 1.26 $ 1.03
Expected life of options (years)   4.0   4.0
Expected volatility (average)   31.3%   32.5%
Risk-free rate of return (average)   1.4%   1.5%
Dividend yield   6.1%   6.6%

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. 

Investor Information

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:

PENN WEST
Penn West Plaza
Suite 200, 207 - 9th Avenue SW
Calgary, Alberta  T2P 1K3

Phone: 403-777-2500
Fax: 403-777-2699
Toll Free: 1-866-693-2707
Website: www.pennwest.com

Investor Relations:
Toll Free: 1-888-770-2633
E-mail: investor_relations@pennwest.com 


Clayton Paradis, Manager, Investor Relations
Phone:  403-539-6343
E-mail: clayton.paradis@pennwest.com

 
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