Volatile Canadian crude prices prompt spending cuts

Penn West Petroleum Ltd. has cut capital spending by as much as 10 per cent and plans to sell up to $1.5 billion of assets to concentrate on its best properties and chop debt while dealing with volatile Canadian crude prices, the company said Friday.

Penn West, which reported a 13 per cent drop in second-quarter net income, said production will lag previous forecasts as it reins in expenditures in line with similar moves by several of its rivals.

For Calgary-based Penn West, one of Canada’s biggest conventional oil and gas producers, many of the cuts are in response to deep discounts for grades of Canadian crude against both U.S. and international benchmarks, chief executive Murray Nunns told analysts.

He pointed out that Canadian light crude at times sold for $25 a barrel less than West Texas Intermediate in the quarter, due to tight pipeline capacity for moving crude to southern U.S. markets and the glut of supplies to the Cushing, Okla., hub. New pipelines in that region are expected to improve the situation next year.

“Current infrastructure projects alone will not solve all of the transportation refining access limitations in North America in the longer term, but they are a significant start,” Nunns said during a conference call.

“Export access from Canada and increased access to U.S. refining is necessary for Western Canadian producers to fully realize the potential value of Canadian oil.”

The company now expects to spend $1.2 billion to $1.25 billion in 2012, down from a budget of $1.3 billion to $1.4 billion. Production is pegged at 65,000 to 168,500 barrels a day, down from 168,500 to 172,500.

Following a second quarter in which pricing for both Canadian oil and gas weakened against a backdrop of pipeline capacity constraints and global economic worries, other companies, including Talisman Energy Inc. and Canadian Natural Resources Ltd., have sold assets or cut spending.

Penn West said it is looking to sell non-core holdings and seek joint venture partners for some early-stage projects in deals that could result in as much as 10,000 barrels equivalent a day of output being removed from the books.

Early this year, it sold $340 mil- lion of assets, though the ones now being prepared for sale, consisting mostly of oil-weighted prospects, spell bigger deals, chief operating officer Hilary Foulkes said.

“The size, quality, and composition of these assets is attracting interest from private equity, pension funds, life insurance companies and national oil companies,” Foulkes said.

In the second quarter, net income fell to $235 million, or 50 cents per share, from $271 million, or 58 cents per share, a year earlier.

Production in the quarter rose 5 per cent to 163,181 barrels of oil equivalent a day.