Penn West Petroleum (PWE) is all set to end 2015 on a high as the stock has shot up close to 80% in the past three months. In fact, in the past week itself, Penn West shares have gained over 20% on the stock market, which might seem surprising given that WTI crude oil prices have dropped to $36/barrel on account of persistent oversupply concerns. So, what’s the reason behind Penn West’s recent surge, and will the company be able to carry this momentum into 2016? Let’s check. Penn West’s cost reductions have helped it arrest the margin slide The past six months have been difficult for the oil industry as the WTI index has declined over 36%. However, on the back of its cost-reduction moves, Penn West has been able to control the decline in its …show more content…
For instance, at the Pembina Cardium play, one of Penn West’s core assets, the company’s efforts under the Cardium program did not bear fruit throughout last year because of unexpectedly low initial production rates in areas of the acreage with lower pressure. But, in 2015, Penn West has been able to drive down drilling costs and improve its well results significantly so that it can improve its return profile in this area. Penn West has deployed integrated geological studies to bolster its position in this area as it carries complex reservoir characteristics, including an increase in the use of cemented liners to complete the wells, while also being choosier about the location and placement of the wells. As a result, Penn West has been able to increase the initial production rate from its three latest wells in the play to more than 500 barrels of oil a day. In fact, one of its wells achieved a single-day-high of 1,500 barrels a …show more content…
This technique has helped it reduce drilling and completion costs to less than $600,000 per well. In addition to the above-mentioned production techniques, Penn West has made certain organizational moves such as reducing the workforce by 35% in the third quarter. This move created an immediate positive effect on G&A costs, reducing it by 18% and bringing down the full-year cost guidance to a range of $2.80-$3.05 per boe. Looking ahead, Penn West sees further reductions in its operating costs in 2016 in a range of 5%-10%, excluding the impact of divestments. Smart divestments and debt reduction moves Since Penn West is now focusing on those assets that can help it improve its rate of returns in a weak pricing environment, it is now disposing off those assets that had a higher cost base. Prudently, the company will be using the proceeds from its asset sales to bring down the debt, and it has already made progress on this