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Penn West drops amid downgrade on debt issues, soft quarter

The company, which has dominant positions in four of Canada's largest light oil fields, said production for the fourth quarter was 97,143 barrels of oil equivalent per day (boe/d), 4 percent below Dundee's estimate and 2 percent short of consensus. 

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Shares of Penn West (TSE:PWT) tumbled after reporting fourth quarter results short of estimates yesterday, with analysts at Dundee Capital downgrading the oil and gas producer to a "sell" rating from "neutral".

The stock fell 7.3 percent to C$1.77 in Toronto this morning, stretching year-to-date losses to over 27 percent.

The company, which has dominant positions in four of Canada's largest light oil fields, said production for the fourth quarter was 97,143 barrels of oil equivalent per day (boe/d), 4 percent below Dundee's estimate and 2 percent short of consensus. 

Cash flow per share came to 28 cents, compared to consensus views for 30 cents.

Dundee said the production miss was due partially to Penn West's Cardium drilling in the quarter, which was focused in lower pressure areas in the southern part of the play.

Meanwhile, Penn West cut its quarterly dividend to 1 cent per share, effective in April, from the recently revised 3 cents. It also relaxed its bank line covenants temporarily, agreeing to revise its revolver down to $1.2 billion from $1.7 billion.

"The agreement is borne from the temporary relaxation of covenants, which we believe has also likely added 20 to 30bps to interest costs as thresholds are approached," said Dundee analyst Brian Kristjansen in a report dated March 13.

"Despite the relaxed thresholds we still see covenants being crossed in 2015," he added.

The research report also highlighted that the company's 2014 reserves disappointed. Proven plus probable (2P) reserves were down 11 percent to 561 million barrels of oil equivalent at year-end 2014, while organic finding and development costs were "materially higher" than prior periods, Dundee said.

"With the company's realized cash netback of $24.63 per BOE, this led to respective 1P & 2P cash recycle ratios of 0.4x and 0.6x, which we expect to be bottom decile," Kristjansen wrote.

Guidance remained unchanged, with management leaving its $625 million capex program and production forecast intact. Dundee said it doesn't see this as "realistic" under its price deck, continuing to expect lower capex of $525 million.

Dundee revised its recommendation for Penn West to sell from neutral, and slashed its target price by half to $1.25 per share, on a revised cash flow outlook.

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