Can Penn West Petroleum Ltd. Survive its Self-Made Predicament?

If Penn West Petroleum Ltd. (TSX:PWT)(NYSE:PWE) can get its debt under control and if the price of oil increases, the company may be able to survive.

The Motley Fool

It has been a near-perfect storm of poor choices and economic scenarios that have led Penn West Petroleum Ltd. (TSX:PWT)(NYSE:PWE) to where it is today. While a lot of it could have easily been prevented, the company was just starting to get things under control when the price of oil dropped. Had the price remained over US$100 a barrel, the company would not be in the situation it is in today.

While it is sometimes good to look back at what got us into this scenario, what should matter to investors is whether Penn West can survive. If you’ve held it for longer than a couple of months, there’s no doubt you’ve lost a lot of money on paper.

Fortunately, I think that Penn West might actually be able to turn everything around. It is going to take a long time, but at this point, you’ve already lost a chunk of change, so the risk might be worth the reward.

Now that it is under new management, the company is getting very good at streamlining operations and selling unneeded assets. For reasons many don’t know, previous management bought assets that really didn’t make sense to the core business.

Dale Roberts, the current CEO of Penn West, was able to make a deal with the lenders that would give it more time to pay off the gargantuan amount of debt that it has. All the company had to do was sell off $650 million worth of assets by 2017; it has succeeded in selling assets over the past year. For example, in April the company sold a large piece of land to Freehold Royalties Ltd. for $321 million. With one sale, it was already half way there.

And the company is going to continue making those sorts of moves. Further, the company is cutting back on overhead, employees, and capital expenditure. It is cutting capital expenditure from $732 million in 2014 to $650 million in 2015. This should hopefully put the company in a decent place to generate cash flow, which will further help it to pay off the debt.

Should you buy?

I would avoid buying Penn West right now unless you want to take a risk. If you already own shares, don’t sell them yet because if the company turns around, you have a chance to hopefully return to a positive number.

Three things need to occur for Penn West to succeed. The first is that it needs to sell an additional $330 million in assets over the next two years. The second is that it needs to continue getting its debt down by keeping costs low and pushing as much money into what it owes lenders. Finally, it needs the price of oil to go up.

If those three things happen, I see no reason why the stock shouldn’t trade at two to three times what it is currently trading at. However, as with most potential turnaround stocks, it could just as easily crash to zero. Therefore, invest only what you can risk to lose because this is a risky investment.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Jacob Donnelly has no position in any stocks mentioned.

More on Energy Stocks

Arrowings ascending on a chalkboard
Energy Stocks

Beat the TSX With This Cash-Gushing Dividend Stock

Canadian Natural Resources stock is well set up to beat the TSX as it continues to generate strong cash flows…

Read more »

energy industry
Energy Stocks

2 TSX Energy Stocks to Buy Hand Over Fist Now

These two rallying TSX energy stocks can continue delivering robust returns to investors in the long term.

Read more »

green energy
Energy Stocks

1 Magnificent TSX Dividend Stock Down 37% to Buy and Hold Forever

This dividend stock has fallen significantly from poor results, but zoom in and there are some major improvements happening.

Read more »

oil tank at night
Energy Stocks

3 Energy Stocks Already Worth Your While

Here's why blue-chip TSX energy stocks such as Enbridge should be part of your equity portfolio in 2024.

Read more »

Solar panels and windmills
Energy Stocks

1 Beaten-Down Stock That Could Be the Best Bet in the TSX

This renewable energy stock could be one of the best buys you make this year, as the company starts to…

Read more »

Dice engraved with the words buy and sell
Energy Stocks

Is Enbridge Stock a Buy, Sell, or Hold?

Here's why Enbridge (TSX:ENB) remains a top dividend stock long-term investors may want to consider, despite current risks.

Read more »

Gas pipelines
Energy Stocks

If You Had Invested $5,000 in Enbridge Stock in 2018, This Is How Much You Would Have Today

Enbridge's high dividend yield hasn't made up for its dismal total returns.

Read more »

Bad apple with good apples
Energy Stocks

Avoid at All Costs: This Stock Is Portfolio Poison

A mid-cap stock commits to return more to shareholders, but some investors remember the suspension of dividends a few years…

Read more »