Calgary-based Penn West Petroleum Ltd., the fifth largest Canadian explorer and producer, is considering whether to convert to an income trust or put itself up for sale, the CEO said Tuesday.

However, while CEO Bill Andrew said there is no firm date for making a final decision, he pointed out during a conference call with analysts that the annual meeting is scheduled for May.

Penn West apparently has been pressured by its investors, led by Chairman N. Murray Edwards, to either convert to an income trust, merge with another company, or put itself up for sale. Edwards is president of Edco Financial Holdings Ltd., and he is a leading investor in or a managing director of several publicly traded companies, including Canadian Natural Resources Ltd., Ensign Resource Service Group, Magellan Aerospace Corp and Resorts of the Canadian Rockies Ltd. He also is co-owner of the Calgary Flames Hockey Club.

Penn West did not have a strong fourth quarter, but it has consistently delivered on its production targets and maintained strong cash flow since it reorganized 10 years ago. Reflecting Penn West’s strong financial position, it also declared its first ever dividend during 2003, a special dividend of C$1.50/share and a quarterly dividend of C$0.125/share payable beginning in the first quarter of 2004.

However, as Edwards noted in a letter to shareholders, last year was “one of challenge and change” for Penn West. “In the first 10 years since our reorganization, we used a formula of equal parts acquisition and development spending, along with a healthy dose of exploration to successfully grow the company.” But increased competition for acquisitions and an increase in operating and finding costs impacted Penn West’s operational performance in 2003.

Penn West, which has about 56% of its production in natural gas, currently operates in five core areas that range from southern Saskatchewan to a region bordering on the Northwest Territories. It focuses on three main commodity/play types: natural gas in northern Alberta and northeastern British Columbia; high quality light oil with long-life reserves amenable to enhanced oil recovery; and conventional heavy oil in conjunction with low-risk, low-cost shallow gas. Coalbed methane also is becoming a bigger part of its production mix.

Penn West reported record net income for 2003 of C$435 million (C$8.09/share, basic), which was 175% higher than C$158 million (C$2.98/share, basic) in 2002. However, fourth quarter net income fell 44% to C$34 million (C$0.65 per share, basic), compared with net income of C$62 million (C$1.16/share, basic) realized in the fourth quarter of 2002.

In the final quarter, Penn West reported a profit of C$34.4 million (US$25.7 million), or C63 cents/share, compared with earnings of C$61.9 million (C$1.14/share) in 4Q2002. Revenue fell 4% to C$304 million during the fourth quarter because of lower natural gas production and lower crude oil prices received because of the stronger Canadian dollar.

Production for 2003 was 101,549 boe/d, up 2% from 99,483 boe/d in 2002. Production of natural gas for the year was 331 MMcf/d, down slightly from 333 MMcf/d in 2002. In the fourth quarter, crude oil and liquids production averaged 47,100 bbl/d, essentially flat year-over-year from 47,300 bbl/d in 4Q2002.

Average natural gas production in the fourth quarter of 2003 was 314 MMcf/d, a 7% decrease from the 337 MMcf/d in 4Q2002. During 2003, Penn West drilled 750 gross wells, up 105% from 2002. During the fourth quarter of 2003, a total of 222 net wells were drilled, primarily in Canada’s Plains and Central areas, with an 87% rate of success.

Production is currently 108,000 boe/d and “is slightly ahead of plan.” However, the company expects to make “further strategic changes…to ensure that we have the proper framework for continuing the growth of Penn West and the enhancement of shareholder value. In that regard, the board of directors has commenced a strategic review of alternatives available to the company…”

Still, the company has maintained a “going forward” attitude. In January, it forecast 2004 net income would be between C$165 million and C$180 million, or C$3-$3.30/share. It also plans to boost spending by as much as 30% as high oil and gas prices fuel rising cash flow. And last month, it closed on a C$234 million acquisition that includes producing properties and 400,000 net acres of undeveloped land located in the Kindersley/Coleville region. The acquired properties are in close proximity to existing operations in southwestern Saskatchewan, and include about 10,000 boe/d of production, with 7,000 bbl/d of conventional heavy oil and 18 MMcf/d of gas.

In a statement to shareholders, Penn West said that it had “received several representations from its shareholders both for and against conversion to an income trust. Only one formal proposal has been received. The proposal from a registered shareholder holding 5,500 shares requests that the board of directors of Penn West carry out a detailed examination of whether converting the operation of Penn West in whole or in part into an income trust is in the best interests of the shareholders.”

The board voted to review three alternatives to examine benefits and challenges for the following options: 1) Maintaining the status quo and continuing its strategic direction as an independent oil and natural gas exploration and development company; 2) Converting the company in whole or in part into an income trust, and in this regard, the board has instructed legal counsel to obtain an advance ruling from Canada Customs and Revenue Agency regarding the tax consequences of a potential conversion to an income trust; and 3) Consider other strategic alternatives, including a sale or merger of the company.

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