Penn West Exploration

Penn West Petroleum Ltd.
Penn West Exploration
Public
Traded as TSX: PWT
NYSE: PWE
Industry Oil and natural gas
Founded Calgary, Alberta, Canada (1979)
Headquarters Headquarters in Calgary; oil and gas wells throughout western Canada
Key people
 David Roberts, President, CEO
Products Oil and natural gas
Number of employees
 1,300 (2014)[1]
Website www.pennwest.com

Penn West Exploration Ltd. (previously known as Penn West Energy Trust) — still referred to as Penn West Petroleum in the media — was a prominent mid-sized Canadian oil and natural gas production company based in Calgary, Alberta. For a while it was one of the S&P/TSX 60, the sixty largest companies on the Toronto Stock Exchange. From 2005-2011 it was a Canadian royalty trust (CANROY), and as such did not pay federal income taxes.[2][3] With a market capitalization in January 2008 of approximately US $9.5 billion, it was the largest oil and gas energy trust in North America.

Penn West Exploration was previously an independent exploration and production company named as Penn West Petroleum Ltd. In May 2005, it converted into an income trust and operated under the trade name as Penn West Energy Trust. This was an entity which pays the majority of its earnings directly to shareholders (known as "unitholders" in a trust), in the form of dividends. Penn West has acquired several other income trusts since reorganizing as a trust in 2005: Vault, Canetic, and Petrofund. These acquisitions made it the single largest energy trust on the continent.[4] In January 2011, Penn West Petroleum Ltd. converted back from an income trust into an exploration and production company. Penn West now operates under the trade name as Penn West Exploration.[5]

Penn West's oil and gas fields are distributed throughout the Western Canadian Sedimentary Basin, a region which is one of the world's largest petroleum reserves. Production comes from three main areas, the "Northern", "Central", and "Plains", areas which stretch from northeastern British Columbia, southeast across central Alberta to southern Saskatchewan, and then along the U.S. border to the border with the province of Manitoba. Penn West projects a production of 200,000 to 210,000 bbl (32,000 to 33,000 m3) equivalent per day throughout 2008, and claims a reserve lifetime of 10.2 years as of December 31, 2006, on the known and probable reserves of 482.8 Mbbl (76,760,000 m3) equivalent throughout their holdings. Of their output, a total of 44% has been natural gas, with oil and NGLs accounting for the remaining 56%.[4][6] In addition, Penn West maintains a project to recover heavy oil from the Peace River Oil Sands.[7]

Penn West became a Canadian royalty trust (CANROY) in 2005. In 2011 the federal government phased out this tax advantaged structure and Penn West reverted to a corporation.[8] The tax status of Canadian trusts changed in 2011 phasing out this tax advantaged structure when Jim Flaherty was the Canadian Finance Minister. Commencing in 2011, trusts would be taxed like all other corporations, at the full 31.5% rate; this would remove the advantage for which they were set up in the first place. Share prices of the trusts dropped immediately after the announcement, which was dubbed the "Halloween Massacre." What prompted the move was that the trusts were costing the Canadian government upwards of $500,000,000 each year in lost revenue.[9]

Since the announcement of the Canadian "Tax Fairness Plan' approximately 90% of Canadian Royalty Trusts (CANROY's) have either converted to corporations, merged with other companies, or simply liquidated. While the Tax Fairness Plan did not require a conversion to corporate status most companies found it beneficial to do so. After conversion most companies were required to slash their dividend payouts to reflect the new level of taxation they would be required to pay.[10]

Penn West investments

Penn West Energy Trust paid a high dividend, yielding an annual rate of between 15 and 16% in early 2008; in addition, it paid out monthly, a relative rarity for equities listed on the New York Stock Exchange. Since the Trust's assets are considered a depletable resource, its dividend payments are not taxed at the regular dividend rate, but rather as return of capital instead of return on investment. This is an additional tax advantage in the United States, and applies to all royalty trusts.[6][11]

At the Penn West shareholders annual general meeting in May 2015 company executives "admitted to accounting irregularities last year. The company said it currently faces six different lawsuits from investors in Canada and one consolidated lawsuit in the United States. More recently, the company was hit with a lawsuit regarding allegations of stock option manipulation."[12]

Canadian royalty trusts (CANROYs)

Penn West was one of a group of oil and gas producers which also included Advantage, ARC Energy, Baytex Energy, Bonavista Energy, Bonterra, Canadian Oil Sands, Crescent Point Energy, Daylight Resources, Enerplus Resources, Enterra, Fairborne Energy, Freehold Royalty, NAL Oil & Gas, Paramount, Pengrowth, Peyto Energy, Progress Energy, Provident Energy, Trilogy, Vermillion Energy and Zargon Energy who did not pay "federal income taxes if they distributed their income to shareholders."[2]

"The resulting double-digit dividend yields grabbed dividend investors’ attention in the mid-2000s. Eventually the government cracked down and starting in 2011, trusts were required to pay the same taxes as regular corporations. Consequently, all trusts converted to corporations, and many cut their dividends."
— Harry Domash

On January 1, 2011, Penn West converted from a CANROY to a conventional corporation.[3]

Accounting irregularities

In July 2014 Penn West's own newly appointed Chief Financial Officer David Dyck had discovered and reported irregularities in the company's accounting practices that "misclassified nearly $300-million in expenses."[13]

Penn West had cut back its work force by almost 50% from late 2012 to June 2014.[13] Penn West's profit in the second quarter of 2014 was $143-million, or 29 cents per share.[13] Rick George who was Suncor's CEO from 1991 to 2012 served as Penn West's CEO from 2013 to 2014.

Penn West reported that preliminary findings revealed irregularities totaling "$381-million in 2013 and 2012." Penn West notified Canadian and U.S. regulators about the irregularities and expanded their own investigation to review results going back to 2007. Lawsuits tied to the accounting irregularities include those in Canada and a class action lawsuit in the United States.[14] According to CBC News, by the end of July 2014, independent auditors contracted by Penn West to review its books uncovered that "$70 million worth of operating expenses that were reclassified as capital expenditures on things like property, plant and equipment in fiscal 2013; $110 million of similar expenses incorrectly classified in fiscal 2012; $100 million in operating expenses that were incorrectly reclassified as royalty expense" in 2012 and 2013.[15]

The 2012, 2013, and 2014 financial statements were audited by KPMG LLP. KPMG was replaced by Ernst & Young LLP for the audit of the 2015 financial statements. [16]

Economic contraction in the economy of Alberta in 2015

Since June 2013 Penn West began decreasing it workforce from 2,350 employees to fewer than 1,000. In response to the recent decline in oil prices, on September 2, 2015 Penn West Petroleum Ltd., announced cuts of about 400 full-time employees and contractors mainly from the company'a headquarters in Calgary which represents 35 per cent of the total workforce at Penn West.[17]

Penn West also suspended "dividend payments to its shareholders after its next payment in October and reduc[ed] compensation for its board of directors."[17]

References and notes

  1. ↑ "Company Listing for Penn West Exploration (PWE)". Retrieved 2012-09-23.
  2. 1 2 Domash, Harry (2011), Canadian Energy: Exploration & Production, Dividend Detective, retrieved 23 December 2014
  3. 1 2 "Penn West Petroleum Ltd (TSE:PWT)", Google Finance, 23 December 2014, retrieved 23 December 2014
  4. 1 2 "Penn West "at a glance"", Penn West, nd, retrieved 23 December 2014
  5. ↑ "Penn West Corporate Fact Sheet", Penn West, 2014, retrieved 23 December 2014
  6. 1 2 Full description of Penn West at Reuters
  7. ↑ Penn West Energy Trust - Oil and Gas Operations - Heavy Oil: Seal – North Central Area
  8. ↑ Cattaneo, Claudia (13 August 2011), Penn West went east to stoke oil expansion, Financial Post, retrieved 23 December 2014
  9. ↑ Lawyer's Weekly: article on Canadian royalty trusts and the "Halloween massacre"
  10. ↑ The Yield Hunter
  11. ↑ Wall Street Journal information page on PWE
  12. ↑ Kyle Bakx (13 May 2015). "Lawsuits the latest challenge for Penn West Calgary-based energy company facing litigation on both sides of the border". CBC News. Retrieved 2 September 2015.
  13. 1 2 3 "'No impact on our strategic direction': Penn West to review results dating back to 2007". Canadian Press via Financial Post. 18 September 2014. Retrieved 2 September 2015.
  14. ↑ Carrie Tait, Jeffrey Jones (1 August 2014). [The Globe and Mail Published Friday, Aug. 01, 2014 7:2 "he Penn West saga: Tom Budd, Rick George and a drama in the making"] Check |url= value (help). The Globe and Mail. Retrieved 2 September 2015.
  15. ↑ "Penn West to restate results after accounting irregularities Calgary oil company worth $5 billion will restate 4 years worth of results". CBC News. 30 July 2014. Retrieved 2 September 2015.
  16. ↑ http://pennwest.mediaroom.com/index.php?s=27585&item=135250
  17. 1 2 Canadian Press (2 September 2015). "Penn West Petroleum, ConocoPhillips Canada slash hundreds of jobs Most of the 900 job losses between the 2 companies will be from Calgary offices". CBC News. Retrieved 2 September 2015.
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