03/12/2015 07:17 EDT | Updated 05/12/2015 05:59 EDT

Penn West to reduce first-quarter dividend further than previously announced

CALGARY - Penn West Petroleum Ltd. is cutting its quarterly dividend to a penny per share and seeking some breathing room for its debt as low oil prices continue to bite.

Penn West (TSX:PWT) chief financial officer David Dyck also said the company has "proactively been in negotiations" with its lenders and debt holders to ensure financial flexibility.

"In spite of the progress we have made on debt reduction, we are still carrying too much debt on our balance sheet. And if oil prices continue to hover in the US$45 to US$50 range, we expect that we may experience some issues with our financial covenants during 2015," Dyck told analysts on a conference call.

A preliminary agreement was reached this week Penn West's noteholders and banks, and the changes should take effect around the middle of next month. The further dividend cut was one measure Penn West agreed to as part of those discussions.

Investors knew a sharp dividend cut was coming, but the announcement Thursday was more severe than expected. In December, the Calgary-based oil producer announced its first quarter dividend would be three cents a share, down from 14.

Cutting dividends has been one measure oilpatch firms have been taking to manage through the steep drop in crude. Prices deteriorated to around US$50 a barrel from highs around US$107 throughout the latter half of 2014, and have languished around that level for much of this year so far.

Desjardins Capital Markets analyst Kristopher Zack said it might be "too little, too late."

The company will likely have to further cut spending and sell assets. And in the current environment, shareholders might not be happy with the price Penn West would get for any assets it divests, he wrote in a research note.

"Although we view the covenant relief positively to the extent that it provides additional breathing room for the company, we would continue to sell the stock as we believe that potential asset sales will likely be executed at unfavourable terms for equity holders."

Penn West sold about $1 billion in assets last year as part of a plan laid out in late 2013 to sell between $1.5 billion and $2 billion in assets.

For the remainder, it's looking like a slog.

"Before commodity prices took a dip at the end of 2014 and early into 2015, we had plans to continue on with our disposition program with primarily non-core and in fact non-producing properties," he said.

"But where commodity prices are, that has caused us to put some of those plans on hold because the market has just moved away from us in terms of being able to sell those types of properties."

For now, Penn West is keeping its capital budget at $625 million for this year, but will re-evaluate its spending for the second half of the year after "spring break-up" — an annual lull in oilpatch activity when the thawing ground becomes too mushy for oilfield equipment to move around.

Also Thursday, Penn West announced its fourth-quarter net loss had widened to $1.77 billion or $3.57 per diluted share from $675 million or $1.38 per diluted share during the same period a year earlier.

Revenue fell to $473 million compared with $622 a year ago.

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