Yesterday I listened to the Enercom presentation by Penn West CEO Murray Nunns. Here are what I believe are the key points:
1) Penn West has an incredible 7 million acres of leasehold in western Canada
2) Penn West has 687 million BOE of proved and probable reserves. And what is important to note is that this reserve calculation is determined assuming vertical drilling and existing spacing.
3) Nunns compared the Pembina Cardium Field in Western Canada with the Permian Basin in Texas. In Canada typical well spacing has been 80 acres while in Texas it is 5 acres. The result is that while in the Cardium the recovery factor has been about 13%, it has been more like 32% in the Permian Basin. In other words there is a lot more oil in the Pembina (Penn West’s property) that can be recovered.
4) So what kind of value would this increased recovery mean to Penn West shareholders ? Penn West has 4 major oil plays. Nunns thinks they can add an additional 100 million BOE from 3 of them and up to 400 million from the Pembina Cardium. That would mean a doubling of Penn West’s existing reserve base.
5) Penn West has an oil sands project at Peace River. It has 6 billion barrels of oil in place. This asset does not show up in Penn West’s reserve figures. The company recently entered into a joint venture with China Investment Corporation to expedite the development of this property. China Investment Corp believes that up to 30% of the oil in these reserves can be recovered.
6) Penn West also has a shale gas play in the Cordova Shale. This week they just announced a joint venture with Mitsui to develop this property. Another good move by Penn West to expedite the development of one of their assets that they would not have the capital to touch for years.
What is particularly appealing here is that this is a very low risk opportunity. Penn West has long been viewed as an unexciting company with great assets that developed them slowly producing a steady stream of cash flow. Now, what is emerging is a company that in addition to being a low risk producer is also a company with very exciting growth prospects. Consider
- Existing reserves of 687 million BOE
- Believe that these can be doubled through in-fill drilling just on existing fields
- Are now developing a large oil sands project that could add hundreds of millions of additional barrels of reserves
- Also have a large shale gas play at Cordova that had been moved forward by years
Currently the NAV of Penn West as calculated by various analysts is around $22 per share. The current share price is $20. So you are essentially paying a fair price for the existing reserves for a company that appears capable of easily doubling those reserves in the coming years. If the growth doesn’t materialize you aren’t going to lose much. If the growth does occur (and there is no reason to think that it won’t) this is going to be a big winner. And if you believe in higher oil prices going forward then this opportunity looks even better.